The effect of advances in Indian cotton yield on U.S. prices makes one wonder. Maybe the WTO should be blaming Bt cotton instead of U.S. subsidies for there being too much cotton in the world.
Indeed, India's widespread acceptance of the revolutionary technology has pushed the country's average yield from a paltry 200-350 pounds per acre to around 550-750 pounds.
“We've always known that with all the acres India has, if they ever figured out how to grow cotton, they'd swallow us up,” Mike Stevens, Swiss Financial Services, speaking at the Ag Market Network's November teleconference. “And it looks like that's happening with their use of Bt cotton. And that's a one-way street, their yields are only going to get better, and they will continue to dominate.”
“India is now the world's second largest producer of cotton,” said O.A. Cleveland, Mississippi State University professor emeritus. “That has taken a little bit of the luster off the potential for December 2008 futures and out.”
“With these high yielding varieties, India is going to give us a lot of competition for our export market,” added Carl Anderson, professor Extension specialist emeritus, Texas A&M University. “And we're not going to see a lot of growth in our export market from 16 million bales. It's probably going to be softer than that in the future.”
Two other factors are weighing on cotton prices short-term, according to the analysts. One is USDA's Nov. 9 crop report pegging U.S. cotton production at 18.9 million bales, up 4 percent from its October estimate but down 13 percent from last year's 21.6 million bales.
Much of the increase is due to higher yields for Texas cotton producers. Projected average yield is 826 pounds per acre, which would be a record yield for the state, if realized.
According to Anderson, record yields “are pushing U.S. cotton supplies well ahead of export demand for the 2007-08 crop. We have lots of weight on this market and we probably aren't going to see December 2007 do much on the upside from where it's been trading in the 62-64 cent range.”
The increase in the size of the U.S. crop by 700,000 bales from USDA's October estimate tells Anderson that low acreage “still maintains a pretty high production level. Combined with a huge carryover from the 2006 crop, that leaves us with a burdensome carryover for 2007 of 7.6 million bales.”
Anderson projects U.S. cotton plantings at 10 million acres next year, with 5 million acres of that in Texas. “So half of next year's cotton acres is likely to be in Texas. That could create additional volatility, especially if Texas has an extremely dry summer like it did in 2006.”
Another downer for cotton was the dollar's biggest rally in over a year, according to Stevens. “Cotton has been absolutely loaded to the gills with bullish speculators, with record open interest of 250,000 contracts, and story after story on the newswires of upward projections of 80-cents plus. The strength of the dollar and weakness in the stock market gave the sign to many to pull the plug, or at least start to reduce some long positions in commodities in general.”
Stevens also fears that an economic recession in the United States could hurt demand for cotton. “Analysts have been using that word a lot lately. Regardless of cotton's supply demand statistics, somebody has to take the goods off the shelf. China is our biggest customer for cotton, but we're their biggest customer for their textile goods.”
While Cleveland agrees that USDA's projection of a larger cotton crop “was the first life for some bears, although I don't think that life is going to be long-lived.”
Cleveland noted that in August, “USDA's estimate of world carryout was 51.4 million bales. Now as we move to October, it's 54.8 million bales. While carryout has increased by a little over 3 million bales, price stayed fairly stable. In fact, price is higher with the 54.8 million-bale estimate versus the 51.4 million-bale estimate. This says we continue to have a bull market.”
The bull is more likely to sleep in the short run. “As we go through the rest of this marketing season, it's going to be hard to push December 2007 higher than 67 cents. I doubt we'll see the 70 cents I thought we'd see. But with all this speculative activity, this market will be extremely volatile at some time. I still remain very positive for the marketing seasons 2008-10.”
“The cotton market is restructuring, and extremely volatile due to trading forces rather than fundamentals,” Anderson added. “It behooves everyone in the business of producing and handling cotton to take a new look and figure out how you can do the best job of pricing the crop.
“You have the alternative of putting it in pools, marketing associations or doing it yourself. If you're thinking about using the loan, be sure you understand how much it's going to cost you to take that cotton out of the loan based on whether the price is above 52 cents.
“There is a lot of pressure now on the entire cotton industry. Options are the best answer with this volatility. You need to think about putting a floor on a price for December 2008 — anything in the mid-70s — and leave the topside open.”
Anderson sees December 2008 “trading somewhere around 72 cents and, hopefully, getting up to 78 cents after Jan. 1. We're looking at carryover for the 2008 crop at 3 million to 4 million bales. That's going to be tight. Short-term, we have plenty of cotton. Long-term, it could be very interesting if the demand for cotton continues.”