Global Production, Consumption Respond to Prices
May 13, 2011 December ’11 cotton futures trailed March futures by some 60 to 80 cents per pound in early 2011. The lower price for 2011/12 new crop indicates market forces expect increased world acreage and production, sluggish demand, and a much lower price this harvest season.
Market information from past market rallies indicates higher prices do increase production and decrease consumption. However, the longer higher prices exist, the more consumption weakens. Therefore, the implication from the record price rally that essentially surfaced in August, 2010 points to fairly stable consumption for the new season compared to the 2010/11 crop.
The longer the current price rally exists well above production cost, the more likely production will outpace consumption, price moves lower, and world carryover stocks increase. Evidence from the substantial price increase to 91.3 cents from the year before the 1994/95 season indicates world cotton acreage expanded 11.3% the next season. World consumption held relatively steady, price slipped to 85.6 cents and continued lower until reaching 58.9 cents in 1998/99, while consumption made a sharp increase. The 1994/95 price surge led to annual increases in world carryover for the next four years. The “A” Index declineed until it reached a depressed level of 41.8 cents in 2001/02, well below production costs in the U.S.
Another brief price rally occurred from 63.6 cents in September 2003 to 76.15 cents in January 2004, and then dropped to 48.6 cents by December 2004. The short price rally during planting increased world acreage by more than 10%. But, with good weather, production increased by 26% and consumption grew by 24%. The big jump in world production in 2004/05 outpaced consumption by 12.5 million bales and created a surplus in world stocks of 60.6 million bales. The surplus continued until a small crop fell short of increased consumption in 2009/10, and carryover dropped to the lowest level in over a decade.
In 2010/11, despite a sizeable increase in acreage, adverse weather in several main cotton producing countries caused production to fall below consumption for the fifth year in a row. With the high price rally in early 2011, world cotton growers are expected to increase acreage this year at least 10% over the 2010/11 season, which could boost production to 126.5 million bales. If consumption for the 2011/12 season slows as in the past market rallies and remains at 116.6 million bales, world carryover stocks could increase 10 million bales from 42 million to 52 million at the end of the 2011/12 season. If so, December ’11 cotton futures could drop below $1.00 per pound.
Price moves in the U.S. market are tied to growth in foreign mill use outpacing production. For the last two seasons, the deficit gap between foreign production and mill use has averaged 21.1 million bales, while U.S. exports averaged 13.9 million, and foreign stocks have decreased about 13.7 million. Assuming foreign use remains steady around 113.0 million bales for the new season, but production increases 10% to 106.0 million bales, the need for U.S. export shipments will decline considerably from 15.75 million this season.
Stocks are tight in the U.S. with record price. It was increased foreign demand for cotton that supported the March ’11 futures price above $2.00 per pound. The opposite price change to below $1.00 will likely happen in 2011.
In seasons when stocks increase, the market peaks in the first half of the year. The market’s function is to support prices high enough at planting time to encourage growers to plant more cotton.
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