facebook_pixel

Shurley on Cotton: New Crop Strength and Outlook

Eighty cent fever is running rampant.

New crop December futures has made a great run, and the uptrend is strong. Support seems to be firm. New crop has gained almost a nickel since the first of the year. Currently, old crop May is at 77 and change, and December is at 75 and change.

I had a meeting recently with a group of cotton producers and was asked “Where would you be on 2017 crop marketing at this point?” Well, before we get to my answer, let’s first look at the situation.

Factor #1. U.S. cotton acres will increase this year. Anyone who doesn’t know this doesn’t know cotton and/or isn’t paying attention. The National Cotton Council survey estimate was 11 million acres. USDA, at their annual Outlook Forum two weeks ago, pegged acreage at 11.5 million. The USDA-NASS estimate will be out March 31. Regardless of which number you want to go with, U.S. acreage will be up this year. And yet, December futures stand at 75 cents with limited weakness below the 70 to 72 cent area.

Factor #2. U.S. exports are doing extremely well. In the March USDA estimates, projected exports for the 2016-17 crop year were raised 500,000 bales to 13.2 million. This makes the second consecutive month that exports have been increased – from 12.5 million bales in January to 12.7 in February and now 13.2 in March.

Exports are significant in the outlook for things to come. Look, China – historically our largest customer – is limiting imports for the second consecutive year, and yet we are still projected to export 13.2 million bales. If realized, this would be the highest exports since the 2010 crop year and achieved without China being a big buyer.

To-date (as of the latest report), export sales total 12.13 million bales – 92% of the USDA estimate. Actual shipments have thus far totaled 7.33 million bales – 56% of the USDA estimate. Shipments lagged behind pace for a while but have picked up.

The largest customers for U.S. cotton have been mills in Vietnam, China, Turkey, Indonesia and Mexico. Sales to China have been 1.88 million bales – only 15% of our total sales. But more importantly, this is more than double what was sold to China for all of last marketing season.

Factor #3.  World stocks are declining. Stocks are still high by historical standards, but this is irrelevant. The market knows most of these stocks (that are in China, by the way) are not going anywhere for the time being. So, it’s like they’re not even there.

China has curtailed cotton area and production and limited imports and will attempt to utilize its stocks instead. There is a large gap between China’s production and mill use, providing opportunity to use stocks or import if needed/desired.

China sold off over 12 million bales of its stocks during 2016 and another round of sales are underway. All eyes will be on these sales – how are sales doing compared to last year, and what is the quality and price?

Last year, the availability of these stocks seemed to provide a little boost to China’s mill industry. After years of decline in the demand/use of cotton, use has begun to slowly recover.

Factor #4. The demand or use of cotton still has a long way to go. World use for the 2016-17 crop year is projected to be 112.43 million bales – down slightly from the February estimate and 1% higher than 2 years ago and last year. Although demand/use is not growing, U.S. market share of exports has increased.

Early 2017 Outlook. December futures are currently in the 75-cent area. No one knows where prices will go. I can draw you up a scenario for 80-cent cotton and also one for 65-cent cotton, and either one could be equally likely to happen.

I’ve outlined four “factors” in play. More than anything else, the good prices we’re seeing at present for 2017 are riding the coattails of the 2016 crop – demand is at least stabilizing, stocks are on the decline, and U.S. exports are doing gangbusters.

The market knows full well that U.S. acreage will be up this year. Prices have not yet reacted to that, because:

  • Acres actually harvested and yield are what really counts.
  • What if exports continue to do well for the 2017 crop?
  • What if the China “gap” gets wider?

The 2016 crop is currently estimated at 17.23 million bales. Acreage abandonment has been low for two consecutive years – 5.5% for the 2016 crop and 6% for 2015. Assuming 11.5 million acres planted (14% more than last year), the U.S. crop could be equal to or less than last year if abandonment is more normal, depending on yield.

Is it likely that 2017 crop prices could eventually come under pressure if the expected crop is large due to even more acres planted or good progress and conditions? Of course. This could be offset by continued strength in exports and U.S. market share.

With new crop December futures in the 75-cent area, I know producers are considering taking protection. Some already have even when prices were 72 to 73.

Although basis obviously varies and has weakened recently, here in the Southeast, the basis for 41-4/34 has averaged about even with the futures, and premiums for 31-3/35 or better have been around 200 to 250 points.

Forward (fixed price) bale contracts at an even or better basis the December futures provide a good opportunity. One concern, however, might be whether or not the contract will pay premiums for color and staple. If not, producers could see this as a deterrent unless the basis is very good.

If you want to take protection but retain the opportunity to do better if prices were to increase, you can do that with a minimum price contract or a Put option. On a minimum price contract, typically the basis is not going to be as good, and with a Put, you have to pay the premium. But in both cases, you could benefit if prices go up. With a Put, you could possibly recoup the cost of the premium by being able to sell your cotton on the spot market and capture quality premiums not offered on a contract.

Okay, I was asked where I would be on 2017 pricing. I tend to be fairly conservative and cautious in my outlook. For 2017, I want some 80-cent cotton if it gets there, but I don’t want to be stuck with the majority of my crop to sell if the market dips to 68 or below. Right now, I believe I would be 1/3 in at this point.

But decisions should be consistent with your attitude toward risk and your willingness and ability to take risk.

Topics: , , ,

Leave a Reply

Market Analysis Stories
Market Analysis

With Market Oversold, Is Bullish Return Near?

July 14, 2017

The cotton invert continues, as both the U.S. and Australian crops are oversold.

Market Analysis

Rain in India, U.S. Keeps Pressure on Prices

July 7, 2017

Beneficial rains in the U.S. and India kept pressure on cotton prices, as the December futures contract settled the past week unchanged.

Market Analysis

Bulls Push Market on Heels of USDA Planting Report

July 5, 2017

Smaller than expected U.S. cotton plantings – and the potential smaller crop – caught the bulls’ attention in the market.

Market Analysis

Market Catching Its Breath After 10-Day Slide

June 23, 2017

After an unprecedented 10-day drop in prices, the market is trying to catch its breath.

Market Analysis

Mother Nature, Not Bulls, Managing the Market

June 16, 2017

Cotton prices took a big hit, and bullish signals are hard to find. Mother Nature is now in charge.

Market Analysis

Shurley: June Report Sends Mixed Signals

June 15, 2017

USDA’s June WASDE report contained some good news and some bad news. Overall, Dr. Don Shurley considers the report somewhat bearish.

Market Analysis

Report Softens Prices, Consumption Concerns Rise

June 9, 2017

USDA’s June WASDE report sent old crop and new crop prices lower at week’s end, as manmade fibers take aim at cotton.

Around The Gin
Product News

Protect Cotton Potential from Weeds, Worms and Diseases

July 12, 2017

Southeast cotton producers say latest technologies from PhytoGen help protect yield and quality.

Product News

Monsanto “Troubled” by Arkansas Dicamba Decision

June 26, 2017

Monsanto has weighed in on the Arkansas Plant Board’s proposed ban of dicamba use in the state.

Product News

Drexel Adds Two Regional Sales Reps

June 16, 2017

Kyle Herring and David Davis have joined Drexel Chemical Company as regional sales representatives.

Product News

Dow AgroSciences Launching Enlist Corn in 2018

June 16, 2017

Following the launch of Enlist cotton, Dow AgroSciences will make Enlist corn commercially available for 2018 after receiving Chinese import approvals.

Product News

Transform Earns Section 18 Exemptions for Cotton, Sorghum

May 4, 2017

Transform WG insecticide has received Section 18 emergency use exemptions for use in cotton and sorghum in select states for the 2017 production season.

Product News

EPA Approves Monsanto’s NemaStrike Technology

May 2, 2017

The EPA has issued registration for tioxazafen, a new nematicide from Monsanto that will be branded as NemaStrike Technology for nematode control and yield protection in cotton, corn and soybeans.

Product News

Indigo Partners Launched for In-Field Technology Testing

April 25, 2017

Indigo is launching Indigo Partners, a collaboration of 25 U.S. growers and agronomic experts to test agricultural technologies – including Indigo’s microbial seed treatments – during 2017.

Product News

UPI Adds New Herbicide Products

April 14, 2017

UPI has added two new herbicides to its portfolio of high quality crop protection products for the U.S.

Latest News
Market Analysis

With Market Oversold, Is Bullish Return Near?

July 14, 2017

The cotton invert continues, as both the U.S. and Australian crops are oversold.

Market Analysis

Shurley: Prices Continue to Flounder in Lower Range

July 14, 2017

The July USDA crop production and supply and demand estimates report was not bad, but prices continue to show no improvement.

Market Analysis

Rain in India, U.S. Keeps Pressure on Prices

July 7, 2017

Beneficial rains in the U.S. and India kept pressure on cotton prices, as the December futures contract settled the past week unchanged.

Market Analysis

Shurley on Cotton: Where Did the Acres Go?

July 6, 2017

Dr. Don Shurley says the recent USDA Planted Acreage report did not deliver as expected, making times a bit confusing for producers looking to manage risk.

Market Analysis

Bulls Push Market on Heels of USDA Planting Report

July 5, 2017

Smaller than expected U.S. cotton plantings – and the potential smaller crop – caught the bulls’ attention in the market.

Market Analysis

Market Catching Its Breath After 10-Day Slide

June 23, 2017

After an unprecedented 10-day drop in prices, the market is trying to catch its breath.

Market Analysis

Mother Nature, Not Bulls, Managing the Market

June 16, 2017

Cotton prices took a big hit, and bullish signals are hard to find. Mother Nature is now in charge.

Market Analysis

Shurley: June Report Sends Mixed Signals

June 15, 2017

USDA’s June WASDE report contained some good news and some bad news. Overall, Dr. Don Shurley considers the report somewhat bearish.

Market Analysis

Report Softens Prices, Consumption Concerns Rise

June 9, 2017

USDA’s June WASDE report sent old crop and new crop prices lower at week’s end, as manmade fibers take aim at cotton.

Market Analysis

Sleepy Market Watching U.S. Crop Progress

June 3, 2017

The cotton market snoozed all week, watching crop development and holding solid at 72-73 cents for new crop December.

Market Analysis

Shurley: Prices Weaker but Remain Above Support

May 31, 2017

As growers complete planting and move fully into the growing season, evaluating the outlook and making price risk management decisions will be crucial.

Market Analysis

Market Settling In as Old Crop Settles Out

May 31, 2017

On-call sales versus purchases are coming in line. Old crop July is done, and the open interest contract leader is now December.

Market Analysis

Fluctuations and Cancellations Create Interesting Week

May 22, 2017

Despite price fluctuations and export sales cancellations over the past week, the cotton market hangs tough as U.S. planting continues.

Market Analysis

Shurley: Is This the Wake-Up Call We’ve Been Expecting?

May 15, 2017

Market movement in the past few weeks may be the wake-up call the industry has been expecting.

Market Analysis

Market Holding, but Lock in Prices Now

May 15, 2017

Cotton’s recent price surge is likely not done yet. But, growers who have not priced their 2017 crop should do so soon before the market softens.