More U.S. Acres, Possible Changes in China’s Cotton Policy Will Drive Market in 2014
March 20, 2014 The good news: the National Cotton Council (NCC) says U.S. cotton producers will plant 11.26 million acres of cotton this year, up 8.2 percent from 2013.
The continuing news: China’s cotton policy will continue to drive world production and prices.
The (potentially) bad news: If China reduces cotton imports as expected, U.S. cotton could find itself in a very competitive global market.
In other words, it’s almost déjà vu all over again, with gains in some areas, and increased risks in others. Yet following a better than anticipated 2013 crop, some softening in grain prices and more concrete answers about the future thanks to a new farm bill, optimism in the cotton market seems a bit brighter than a year ago.
However, according to Gary Adams, there are some trends that bear watching.
Acreage Projections Point Up
Based on the results of the NCC’s annual Early Season Planting Intentions Survey, upland cotton acres will bump up to 11.04 million acres in 2014, an 8.1 percent increase over 2013. Likewise, extra-long staple (ELS) acres are expected to show an 11.8 percent increase this year, up to a total of 225,000 acres. Overall, that should lead to an expected crop of 16.4 million bales for 2014.
As with all surveys, the results reflect a snapshot of intentions based on market conditions at survey time. Actual plantings may be influenced by changing market conditions and weather.
“History has shown that U.S. farmers respond to relative prices when making planting decisions,” said Adams, NCC vice president, Economics and Policy Analysis. “Coming off of last year’s 10.4 million acres of all cotton, the survey suggests that growers are again responding to relative prices by increasing the intended plantings. However, as the state-level results show, the increase is not universal across the states and production regions.”
Survey respondents throughout the Southeast indicated a 1.2 percent decline to 2.63 million acres. Alabama, Georgia and Virginia showed increased cotton acres, while growers in Florida and the Carolinas indicate declines due to acreage shifts to other crops.
The Mid-South showed a 12.5 percent increase in cotton acres – up to a total of 1.39 million acres – with all states except Arkansas showing projected growth.
Southwest growers indicated a 12 percent increase, bringing the regional total to 6.74 million acres. Most of the growth is coming from acres shifting back into cotton from grains. But improved moisture is also bringing some acres idled in 2013 back into production.
Western results are mixed. Growers in Arizona and New Mexico intend to plant more cotton in 2014, while California will see decreases in upland cotton acres due to water issues and competition from other crops. For the region as a whole, the survey reports projected 275,000 upland acres, down roughly 6 percent from 2013.
ELS growers intend to increase acreage by 12 percent to 225,000 acres in 2014. Some California growth is projected to come from upland acres, with sizeable increases also coming in Arizona, New Mexico and Texas.
China Remains a Question Mark
Over the past few months, the market indicated a coming shift in Chinese cotton policy. Although anticipated, the details of any changes are still unclear, leaving cotton’s outlook once again under China’s influence for 2014.
“The one thing we see is that China stands above all others in terms of the question marks that we have,” said Adams. “It has certainly shaped where we’ve been over the last three years, and it continues as we look ahead to 2014.”
Adams pointed out that China – under its current cotton policy – purchased approximately 75 million bales of cotton for their reserves over the past three years, including the country’s internal crop. Although world production of cotton has continued to exceed use outside of China, the Chinese have generally absorbed the excess cotton and helped support prices, which have moved in a sideways range over the past year.
“Because prices have stayed relatively stable, we’re not seeing a signal being sent at this point to countries around the world to really back off of production,” stated Adams.
Adams believes the change in China’s cotton policy will come following the 2014 crop.
“They will be moving toward a target price mechanism,” he reported. “Details have not yet been announced, but it’s been indicated that the target price program will apply only to the western region of their country, which accounts for 60 percent of their production.
“Obviously, there are still many questions to be answered regarding production, what they will do with their reserves and how this will impact the export market.”
The NCC economic outlook report projects China’s cotton production to fall to 30.1 million bales in 2014, down 3 million bales from 2013. Mill use in China should see modest growth to 36.4 million bales, leaving a 6.3 million bale differential with production. But, with nearly 54 million bales currently in reserve, any production shortfall can be easily managed.
“Strictly looking at the balance sheet, China does not need to import any cotton,” said Adams. “However, that is not expected to be the case. China must open 4.1 million bales of import quota at a minimal duty in order to comply with their WTO accession commitments. It is also expected that some amounts of quota for the processing trade will be made available.
“Under these assumptions, the NCC projects China to import 6.4 million bales in the 2014 marketing year, down from 11.0 million bales in 2013. If realized, it would be the smallest level of imports in a dozen years.”
2014 should mark the fifth consecutive year with global cotton production exceeding consumption. But, unlike recent years, world stocks outside of China are expected to increase. Since the U.S. annually exports more than 70 percent of its cotton production, Adams suggests that growers keep an eye on this potential development.
“Smaller imports by China and increased stocks outside of China underscore the very competitive markets facing U.S. cotton,” he stated.
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