For the next few months, U.S. cotton prices are likely to rise and fall on the ongoing Texas drought, which for the last three years has cost the state nearly half of its planted acres. Will Mother Nature relent this summer, or will misery and misfortune continue?
The outlook is sketchy at best. “Going into the fourth year of the drought in Texas, long-range weather forecasters say we are in a major cycle of drought in that area that can last anywhere from five years to 10 years,” said O.A. Cleveland, professor emeritus, Mississippi State University, speaking at the Ag Market Network’s May conference call.
Cleveland also pointed toward lower acreage in California, where drought conditions also persist, and the delayed status of planting in the Mid-South due to cooler weather as other environmental factors to consider.
“We have another 45 days to get moisture out in West Texas and get a clear picture of the rest of the U.S. crop, but given the situation as it is, even if we get a couple of good rains in Texas, we will continue to need moisture falling on that crop to get anything near a normal crop,” Cleveland said.
Cleveland view of the worldwide cotton situation differs significantly from USDA’s May supply and demand estimates, “which is suggesting higher supplies around the world and higher supplies in the United States.”
USDA lowered U.S. exports by 300,000 bales, then through revisions to 2012-13 data, added another 3 million bales of cotton around the world, “which increased world carryout considerably,” Cleveland said.
Cleveland believes that USDA “has consistently underestimated Chinese demand and consumption and has overestimated Indian stocks and to some degree Indian production. This does play tricks on the market.”
Cleveland says one factor not being considered is the poor quality of the 2013 Chinese cotton crop. “The mills are shunning it. They will buy 2011 cotton and 2012 cotton from their reserve much quicker than they will buy the most recent crop.”
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The market doesn’t seem to be in agreement with USDA either, Cleveland noted. “While USDA has been increasing carryover levels and increasing stocks, markets were tending to ease higher and higher. So the market is suggesting that those stocks just don’t exist.”
Cleveland said USDA’s first look at the 2014-15 U.S. and world cotton crops, “indicates a reduction in production primarily from China and Australia, because of their irrigation problems. We should see a bit of a reduction in India production, yet there is a high probability that India will supersede China as the world’s largest producer of cotton this year, if not, certainly in the very near future.”
More bullish news is that cotton consumption is increasing around the globe, Cleveland says. “We’ve seen better retail consumption of cotton finally coming out of Europe. At the mill level, we see very strong increases coming out of China. We’re going to see more imports going into China, possibly as much as 3 million to 4 million bales more than USDA is estimating.”
While USDA is forecasting declining Vietnamese cotton consumption during this coming season, Cleveland sees Vietnam’s consumption skyrocketing higher. “Vietnam has become a major importer of U.S. cotton, one of our better markets now.”
Cleveland also estimates that ending stocks outside Chinese inventory is between 5 million and 6 million bales less than what USDA is estimating. He also noted that U.S. exports “have been stronger than USDA had expected.”
Cleveland said a near-term factor for the cotton market is that July unfixed call sales “are actually increasing with just six weeks before we go into a delivery. It’s telling us that we’ve got to be careful with this market. We’re getting into a situation where we could easily have some sort of a squeeze on the market.”
Carl Anderson, Extension professor emeritus, Texas A&M University, says a volatile cotton market is ahead, “particularly over the next two or three months.”
He pointed out that over the last three years of drought, Texas has abandoned 62 percent, 41 percent and 45 percent of its planted acres.
“We’re well on our way for that to happen this year. With our stocks as tight as they are, it leaves us in a situation where we could get both fundamentals and speculative pricing on the bullish side, and run up our prices on the rest of the old crop and the new crop.”
Anderson’s price range for cotton over the next two months is 80 cents to 89 cents on December 2014. For old crop, I would put us in a range of between 85 cents and 95 cents. Long-range, through harvest season, for December 2014, I would go to 70 cents on the bottom and 89 cents on the top.”
Kelli Merritt, cotton producer, broker and merchant from Lamesa, Texas, says producers should consider pricing cotton “anytime December 2014 gets to 82-83 cents. I think there may be the opportunity to price it above that. But I don’t think that it hurts to begin pricing some at around 83 cents.
“Typically we see this market pop out somewhere between now and June and July. I would like to see farmers have quite a bit of this cotton priced by then. I know these last few years, we’ve seen higher prices at harvest. It may be that way again, but it’s good price risk management to get some hedges on as we get opportunities.”
Merritt sees a range between 87 cents and 89 cents as a high for new crop cotton and a range of 75 cents to 78 cents for a low. “On July, I think we could flirt with a dollar as we get into the delivery. We could go as low as 85 cents before July goes off the board.”
“I think July trades 90 cents to a dollar, said Cleveland. “My new crop range is 78 cents to 90 cents.”