Cotton production in the two top-producing states is off to a slow start, which could result in a significantly smaller 2008 U.S. cotton crop this fall of between 12 million and 13 million bales, according to market analysts. USDA has projected a U.S. cotton crop of 14.5 million bales.
In Texas, “the crop has been hit with 100-degree temperatures, a three-day period of high wind and blowing sand that cut a lot of cotton down, followed by more dry weather,” said Carl Anderson, professor, Extension specialist emeritus, Texas A&M University, speaking at the Ag Market Network's June teleconference.
Texas is beyond replanting dates for most areas, according to Anderson. “I expect the Texas crop has already lost a million acres of the 4.7 million acres planted. Last year, we had only a 200,000-acre loss. Yields will also be reduced from last year's crop. I expect this will cut our crop by 1 million to 1.5 million bales, indicating a Texas crop of 6.5 million to 7 million bales.”
Anderson noted that Texas and Georgia — which is also off to a slow start — “account for over 60 percent of the planted acreage in the United States.” Because of this, Anderson projects a U.S. cotton crop of less than 13 million bales.
Under that scenario, and if export demand continues to be strong as expected, the projected U.S. old crop carryover of over 10 million bales could be cut by more than half.
O.A. Cleveland, professor emeritus, Mississippi State University, isn't discounting the potential of the U.S. cotton crop just yet. Cleveland recalled a recent spring when a “pathetic” Mississippi cotton crop turned into a record crop by fall. “It seems like the market kills the crop two to three times a year. I think it's far too early to suggest that these significant problems in Texas are going to last. Nonetheless, it could happen.”
Cleveland also noted that with the high prices for corn and soybeans, “we could lose another 1 million to 2 million acres of cotton next year if cotton prices don't follow corn and soybeans. Cotton has to show a little ‘umph’ to keep acreage. I'm optimistic long-term without question.”
In the world, Anderson noted that foreign cotton production is expected to fall about 20 million bales short of use, which is about the same deficit gap as in the last two years. World production is expected to decline by about 3 million to 4 million bales, with much of the decline coming from the United States, due to the decrease in planted acreage.
Anderson believes that new crop world stocks could decline by 5 million bales, versus USDA's forecast of 7.5 million bales. “Either way, we're headed toward a smaller carryover and a better balance between supply and demand in the world. But we have to get this surplus out of our way and out of our warehouses.”
As for prices, Anderson expects the A-Index (a representation of the international price of raw cotton) to increase from the current 73-cent level to nearly 80 cents for the coming season. Anderson believes the average price received by U.S. farmers will be somewhere around 72 cents, “which basically means there won't be any counter-cyclical payment. If there is, it's going to be very slim.
“The structure of the cotton price is now operating under a complete new set of unpredictable forces. It's very difficult to feel comfortable with what might happen in the market. That puts a lot of pressure on everyone to figure out how to deal with explosive price changes.”
Anderson said that in order to insure that futures and cash prices will converge, the cotton industry will test the effective ability to deliver cotton on the futures contract price. “We're hoping that this will control the price more in line with supply and demand, at least in the nearby futures contract. It won't save the possibility of volatile price moves of any contract out in the future.”
Anderson noted that the July futures price, which has been in the mid-60-cent range for the past several weeks, “has encouraged a rather large amount of export sales. On the other hand the movement of cotton is limited by the lack of containers, railcars and the high cost of shipping.
“We have a lot of things to work through. I'm bearish short-run, but I turn bullish as we get into December 2008 and 2009.”
Meanwhile export sales of cotton have picked up considerably in recent weeks. During a two-week period in late May and early June, sales averaged well over 400,000 bales per week. Shipments for the week ending May 31 picked up a little at 308,000 bales, but according Mike Stevens, Swiss Financial Services, “that's way behind what we need to do” (to reach export forecasts for old crop cotton).
Stevens added that there is a strong seasonal pattern that December cotton usually begins to decline from the third week of June, once the planting scares are winding down. In fact, December cotton has declined 14 of the last 15 years from the third week of June on.”