September 1, 2011
The August USDA projections indicated lower estimates of world consumption for both 2010/11 and 2011/12 and increased cotton stocks. The rate of consumption has weakened because of soft retail demand and increased use of polyester as a substitute for cotton.
World ending stocks for the 2011/12 season are expected to increase sharply to an adequate level of at least 46% of use. That is up substantially from 39.5% the season before.
The December 2011 futures price, in early June, peaked around $1.40 per pound and then dropped to below $1.00 per pound by July 15, 2011. In the last month, December 2011 has traded around $1.00 per pound because export demand has essentially dried up at current price levels.
As expected, increased foreign production and reduced consumption has decreased the foreign production-consumption deficit gap for the 2011/12 crop to only 5 million bales. Foreign production was 13.6 million bales short of use in 2010/11 and a sizable 25.7 million bale deficit gap in 2009/10.
This season's foreign crops are doing well, especially in China and India. The export demand for U.S. cotton is sluggish, even at $1.00 per pound. Earlier export sales at much higher price levels than now are being cancelled at a rapid pace.
Because the U.S. is a residual supplier of cotton to the rest of the world, the extremely poor conditions of the Texas crop has little impact on the world market. With the Texas Cotton Crop Condition Index hovering close to 35% for the last two months, the West Texas irrigated crop yields are being reduced considerably. It now appears harvest in Texas will be in the 4.0 to 4.4 million bale range. The Oklahoma crop is even a worse production disaster.
The cotton crops in the Southeast, Delta States and Far West are in mixed conditions from poor to excellent. The U.S. crop harvest may be in the 16.0 to 16.5 million bale range. That should be sufficient to cover domestic use and export demand with several million bales left over to increase carryover stocks up to 4 or 5 million bales, unless price drops below 90 cents per pound.
Although certified stocks are currently very low, there should be sufficient new crop cotton by Thanksgiving to allow a large increase in certified stocks for delivery on the December 2011 cotton futures contract. If so, the market will rely mainly on supply and demand for the price level in November before first notice day.
Unless there is a major reduction in the foreign crop, expect demand to continue weak for the 2011/12 world crop. And, world carryover to increase some 10 million bales over the 45 million in 2010/11 to a very sufficient level for all users of cotton. December 2011 futures will likely struggle to remain over $1.00 per pound.
The Ag Market Network Teleconference will be on Tuesday, September 13, 2011 at 7:30 a.m. Central Time. The featured speaker this month is Mike Stevens, Cotton Analyst Commodity Trading Advisor. He will be joined by the cotton panel -- John Robinson, Carl Anderson, Mike Stevens, and O.A. Cleveland. Pat McClatchy is the Ag Market Network Moderator. The conference will be live on radio station KFLP 900 AM, Floydada, Texas; and KZIP 1310 AM, Amarillo, Texas; live over the Internet at www.AgMarketNetwork.net; or you can listen to a recording around noon at www.AgMarketNetwork.net. Weekly updates are made on Friday afternoon by Mike Stevens.