Bull Riding

By Jim Steadman

Dr. O.A. Cleveland

In 2016, Texas growers planted 5.7 million acres of cotton, according to USDA reports – more than half of the 10.1 million planted acres in the U.S.

For 2017, preliminary estimates are already forecasting total U.S. cotton acres to range from 10.8 million to possibly as high as 11.3 million. The forecast for Texas is also bullish, with acreage estimates in the 5.9-6.0 million range. It’s all right in line with the bigger and better tradition of the Lone Star State.

But one other factor – cotton quality – shined a bright light on Texas cotton in 2016. Although final production numbers for the year are still being tabulated, the quality of the recent Texas crop cannot be questioned.

“We brag on our cotton quality in the Mid-South and Southeast,” said Dr. O.A. Cleveland, professor emeritus of agricultural economics at Mississippi State University, during the recent Cotton Grower SoundOFF session at the 2017 Beltwide Cotton Conferences in Dallas. “But Texas cleaned our plow this past year. The quality is so great that mills are asking for ‘Texas Pima’ when talking about upland cotton.

“It’s a great crop. And it’s great to be back in this position again.”

A Fine Line Between the Bulls and Bears
Looking ahead to the 2017 crop, Cleveland’s analysis of the cotton market bodes well for growers, thanks to a current bullish trend in the market. But he’ll also be the first to temper that optimism, based on bearish potential lurking in the shadows.

“From a bullish perspective, U.S. exports are exploding,” states Cleveland. “The last USDA estimates of 2016 have exports at 12.3 million bales. We have been on a pace over the last five months to export 16 million bales. We’re not going to do that. But I would suggest that USDA will have to increase their export numbers over the next seven months, possibly as much as 1.5-2.5 million bales. Those numbers are going to have to come up.”

Simple supply and demand are driving the jump in export numbers – the U.S. has a high quality crop, and we’re selling more of it to China than originally thought.

“Textile mills are able to buy U.S. cotton this year at a steal, compared to what they have paid for other growths around the world over the last several years,” points out Cleveland. “They recognize the crop we have, and they are willing to buy it. They’re buying ahead, and are planning to store some of the cotton they buy this year.”

Cleveland believes one key factor driving the bulls is the current relationship between call sales and call futures. As he explained it, call sales are sales to textile mills reported to the Commodity Futures Trading Commission and backed by futures contracts. For March cotton, call sales are at about a 7:1 ratio, but for May and July cotton, that ratio climbs to 10:1. Put simply, for every futures contract that must be sold, there are 10 others that have to be bought between now and July.

“There is tremendous pressure,” says Cleveland. “The market sees this and knows this. The textile mills have done an extremely poor job of pricing their cotton. They are being squeezed, and they’re going to have to pay up.”

Cleveland also notes that there’s an “era of good feeling” in the economy following the Presidential election. That may also bring an era of inflation – something that Cleveland thinks may not be a bad thing.

“The idea that inflation is in the air means the economy is getting ready to go,” he explains. “There’s going to be a lot of money in the economy. Commodities increase during periods of inflation, and cotton is part of that structure. There is little hedge pressure in cotton and lots of reasons why this market is looking for buyers.

“Huge investments from speculatives and index funds are bringing hundreds of millions of dollars to the commodity markets right now, and cotton is getting its share.”

Polyester prices are also currently beneficial to cotton demand. According to Cleveland, polyester prices in China have increased 20% since October, largely due to the country closing a number of polyester mills because of pollution. But support for U.S. cotton at the mill level is also stronger. And cotton’s sustainability benefits over polyester are beginning to take hold at other levels of the supply chain.

Yet, Cleveland warns that too much price growth could backfire on the market, opening the gate for the market bears.

“We’re getting close to potential demand destruction,” he states. “In February and March of 2011, we basically cut off demand for U.S. cotton because the prices got into the 90s and just destroyed demand totally. I would suggest to you by the time the mills begin fixing their prices – and that time is coming – we could begin to top out somewhat with respect to prices.”

International trade could continue to be a possible stumbling block for U.S. cotton. As Cleveland points out, trade regulations with respect to other commodities have been positive and defended by the government, but very little has been done to protect U.S. cotton trade.

“There are some significant trade issues that must be debated,” he says. “But one way or the other, it can all be traced back to China and polyester prices.”

Be Ready to Market
So what should cotton growers look forward to in 2017? Cleveland says look for a large crop. And be ready to move on marketing decisions.

“My major concern with this market is it’s getting oversold,” he explains. “The next resistance level is at 75 cents. If we clear that, some believe we’ll go to 80 cents. But we’re not going to 90 cent cotton. There’s not that much demand. The world still has plenty of cotton, but not a lot of quality. The U.S. has that this year. With respect to the 2017 crop we’re getting ready to plant, sell 25% of it today. With the 2017 crop acreage you thought you were going to plant a month ago versus the acreage you plan to plant today, I’d say sell 50%, if not 75%, of that.

“What I’m saying is, down the road, I think prices will go lower. But between now and July, I think we have a very nice market.” ■