The future looks rosier for U.S. cotton production and market prices. It's what happens in between now and then that remains uncertain, according to analysts speaking at the Ag Market Network's Aug. 14 teleconference on the cotton outlook.
On Aug. 12, USDA lowered crop production worldwide for both new crop and old crop cotton, including significant declines for India, which has emerged in the last few years as a big export competitor for the United States.
On the downside, China's cotton usage was cut by 250,000 bales for the old crop year and 500,000 bales for new crop, “in keeping with expectations we've been hearing about lower demand and economic slowdowns,” noted John Robinson, Extension economist, Texas A&M.
However, projected declines for world cotton carry-in and production more than outweighed the declines in consumption, thereby whittling forecasted ending stocks by 2.25 million bales from the last report and almost 10 million bales since 2006. It lowered the world stocks-to-use ratio to 41 percent, compared to almost 49 percent last year.
“The implication of that is a stronger price worldwide,” Robinson said, “which suggest very little chance of counter-cyclical payments or government payments based on the adjusted world price kicking in.”
In the United States, the cotton trade anticipated less production and higher abandonment in USDA's report, and that's what it got. Harvested acreage comes in at 7.85 million acres, with 15 percent abandonment. Average yields climbed to 842 pounds per acre, while production is estimated 13.77 million bales.
According to Robinson, one set of numbers sure to be revised in the future is the ending stocks figure from 2007-08, which was left at 10.2 million bales, “even though the export target wasn't met. The carry-in is going to rise for 2008-09.”
There is still quite a bit of uncertainty about the size of the U.S. cotton crop, according to Robinson. “On average over the last 10 years, USDA's August projection was off about 8 percent from final estimates. Typically, when short crops get shorter, the percent change from the August report was 5 percent to 10 percent. When big crops get bigger, the average change from August was 5 percent to 15 percent.
“Recent history suggests we could swing this crop by 1.1 million bales on either side of the current forecast of 13.77 million bales. Any way you slice it though, we're going to come out with lower ending stocks for 2008-09. So there is a stronger rationale there for stronger prices.”
Texas cotton production is another uncertainty. Roger Haldenby, vice president, operations, Plains Cotton Growers, Inc., was surprised to see USDA's production estimate for the area in Texas represented by PCG to be much higher than the group anticipated, at 3.7 million bales. “We couldn't see any more than 2.7 million bales from this 41-county area.”
For the region to reach USDA's forecast “would depend on continued, timely rainfall over the next several weeks coupled with ideal growing conditions, and a late fall to make sure the late-planted crop is maximized. Experience tells us this is very unlikely. We believe that this is a small crop and will only get smaller from USDA's 3.7 million bale estimate.”
According to O.A. Cleveland, professor emeritus, Mississippi State University, the Mid-South and Southeast crops have come on strong since planting. “Basically, much of the area dedicated to cotton is irrigated. It's very good cotton soil, so it's very forgiving of problems that occur early in the year.”
On short-term prices, Cleveland says the markets “might try to take December back below 69 cents. If we do, I think it will be only marginally below, down to 68 cents. I don't think it will stay there long. I tend to think prices will move back up into the low 70s. I don't think we'll get to 74 cents until we get a better idea of this crop size. We'll still have 51 million bales of cotton around the world next year. That's still a big carryover.”
Cleveland believes the market will have to move higher at some point to compete for acreage in 2009. “I think we have a couple more months before the tightness of 2009 becomes apparent. I'm positive longer term. In the next two to three years, that acreage in China and India is going to be dedicated to food crops as opposed to fiber, which should increase the price of cotton.”