2011 Cotton Market: A Study in Contrasts

In looking at the cotton market, I am struck by some major differences in both time and space. These include the extreme differences in current soil moisture conditions across different regions of the U.S., a much poorer crop condition this year versus last year, and lastly the old-crop price situation compared to the new-crop outlook. 

 

While the temptation is certainly to paint a very bullish picture based on a potential short supply, I argue that the market outlook for the 2011 crop still has a lot of uncertainty. 

 

2011 Weather Market: The big story this year is the weather, and it involves two extremes. By May the Southwestern drought covered the major cotton growing regions from Louisiana to Arizona. This may encompass as much as 3.5 million acres of dryland cotton plantings in Texas alone. 

There is also another drought zone stretching along the Upper Gulf Coast around to Georgia. 

 

Arkansas was in the drought zone, too, but it swapped places to join the other extreme: high rainfall and flooding river basins, particularly in the North Delta. This has resulted in delayed crop plantings which are only now being filled in with late planted cotton or soybeans. 

 

The June 30 Planted Acreage Report from USDA may clear up some of this planting uncertainty, but I expect that some will remain. More uncertain is the potential impact on production and the possible extent to which the Mid-South situation will buffer the Southwestern drought situation.

 

Crop Condition: As the old saying goes, what a difference a year makes. The first six months of 2010 were dominated by news of superlative crop conditions. Soil moisture was excellent, and the weekly USDA crop condition ratings were the highest in memory. This led to expectations of strong supplies and softening prices by harvest. 

 

Well, even though abandonment was exceptionally low, we didn’t see record yields. Mostly foreign supply and demand issues ended up driving cotton prices to record levels. 

 

The U.S. production story took a back seat to all this, but compare it to what we see now. Even if Texas has 35% abandonment, we will be left with a very patchy situation that will be dependent on timely rains. Will they come? In some spots, yes, but we won’t know the effect of that until USDA goes out and samples the bolls. 

 

In the meantime, the condition ratings are a lot lower than in 2010. But condition ratings are not the best predictors of the outcome. 

 

And what of the late-planted cotton in the Mid-South? It will need not only good growing conditions, but more than the usual amount of clear maturation weather this fall. So there is more than the usual amount of supply uncertainty in this crop, and some of it won’t be resolved for many months.

 

As a result, I am hesitant to simply carve USDA’s current production estimate down below 17 million bales without a comprehensive picture of yield potential, which we won’t really have before September. That implies about six weeks for hedgers, speculators and hand-waving analysts to prognosticate over the market direction until we have statistically reliable benchmarks of yield and production.

 

Price Outlook: The main cotton marketing question of the year also implies a contrast: Will new crop cotton prices be as high as the record prices for the 2010 crop? 

 

Even if the U.S. winds up short, I don’t expect a return to the record high prices of last season. The U.S. balance sheet is just as subject to variability in exports as in production. U.S. exports are dependent on foreign production. 

 

We are seeing increased cotton planting worldwide in response to high prices. It is still true that bad weather, resource limitations, government policy, or political turmoil can all limit or delay price responses by farmers. 

 

But I don’t think it is unreasonable to see world cotton ending stocks-to-use climbing back up over 40%. The cotton market has already absorbed and adjusted to some of the major shocks of 2010 regarding Chinese stock levels and Indian export policy. Hence I don’t expect as much of the panic factor on the part of foreign mills. 

 

I am inclined to think that this will result in December 2011 futures trading between $1.00 and $1.80 per pound, with $1.20 and $1.60 per pound more likely. I don’t expect new crop prices to repeat the record levels of old crop prices short of some unforeseen supply shock.