April 12, 2013
The April USDA supply and demand estimates for 2012/13 U.S. cotton includes offsetting increases in production and exports. This leaves U.S. ending stocks unchanged from last month at an adequate 4.2 million bales.
World estimates show increases in beginning and ending stocks and sharply higher trade. Carryover stocks are at a surplus 82.5 million bales. The world balance sheet shows an imbalance in ending stocks between China and rest-of-the-world (ROW).
China holds over half the stocks and uses only a third of the cotton. The ROW uses two-thirds of the cotton and controls less than half the stocks. Thus, China has more than a year’s cotton use in government storage. On the other hand, the ROW has about half a year’s use. Cotton price in the 80 to 90-cent range is being mostly supported by the ROW scrambling to find available cotton for sale.
With world cotton supply and demand completely out of balance between government control and private availability, the uncertainty of lower or higher price is substantial. Demand appears fairly steady around the 80 to 89-cent range.
But, policy decisions and weather conditions around the cotton world can influence available supply and price levels for the next 12 months. Price could swing towards 70 cents or $1.00 per pound. Direct and indirect trading forces could join together and quickly move the cotton market either way substantially. Some 400,000 bales of certified cotton for delivery on futures contracts will, from time-to-time, tend to bring futures prices and cash prices in line with real demand.
With foreign production and use fairly close, the U.S. export market may slow down for the 2013/14 crop. Cotton acreage in the U.S. could increase another million acres to 11 million planted. However, in Texas, because of persistent dry weather, planted cotton acreage abandonment will be high.
The purchase of options protects against adverse price changes and allows benefits from favorable price moves. Options and option spreads may be used alone, with forward contracts, and with futures.
Producers need a plan to set a price floor on some of their cotton in the low to mid-eighty cent level. Markets are not going to give you anything unless you take pricing opportunities from the market.