March 17, 2014
The March 2013/14 cotton estimates by USDA for U.S. included a 200,000 bale increase in exports to 10.7 million bales. As a result, ending stocks were decreased 200,000 bales to a tight supply of 2.8 million. That is the lowest carryover since 2.6 million bales in 2010/11. The estimated producer price for the 2013/14 season was raised one cent on the lower end to a range of 75 to 78 cents.
The 2013/14 world supply and demand estimates were revised slightly to lower consumption and higher ending stocks. World carryover stocks are a record surplus of 97.6 million bales. The world surplus is distorted because China has 58 million bales and is expected to use only 35.5 million bales.
The large stockpile of cotton under Chinese control, competitive polyester prices, and uncertain “new” crop world production create uncertain price movements for the season ahead. New crop December ’14 futures have been lagging nearby futures some 10 cents per pound for several months.
Volatile U.S. price movements are expected. Policymakers in China will likely shift policy away from building stocks. Any method they implement to reduce stocks could place downward pressure on price. Otherwise, cotton available for export outside of China is limited, especially from the U.S.
In Texas, cotton acreage planted is expected to increase substantially. However, moisture across most of the cotton area remains very dry. Therefore, with Texas cotton acreage half of the U.S., the U.S. crop may fall below average the fourth year in a row. Thus, drought might continue to reduce the available cotton outside of China for export during the 2014/15 season.
At this time, U.S. cotton export shipments are strong and need to average 223 bales per week to reach the 10.7 million bale USDA estimate by August 1. By comparison, the U.S. exported 13.0 million bales the season before.
Speculators are holding a large amount of long future positions that have provided some extra support for nearby futures in recent months. If speculators decide to liquidate quickly, prices would likely weaken.
Since early February, nearby futures have strengthened to trade between 85 and 92 cents. Meanwhile, December ’14 has traded much lower in the range of 76 to 80 cents. The market recognizes the potential for lower prices during the second half of this calendar year.
Put option premiums are fairly reasonable price insurance against a potential decline in December ’14 futures. During price rallies, out-of-the-money December ’14 put option strike prices can be purchased to provide different levels of price protection.