Bullish Hope Challenged
March 19, 2009 December ’09 futures by November had dropped in excess of 50 cents per pound in 4 months. In the meantime, the worldwide economic and financial crisis surfaced, tightening consumer’s spending on cotton goods.
With income increasing rapidly in many countries, the consumption of world cotton increased by a surprising 4.8 million bales on average in the 8 years ending in 2006/07. Total use increased from 85 million in 1998/99 to 123 million.
However, use slowed last year and is slowing much faster this year. It will take less than a 5% decrease in world use to boost carryover stocks to more than ample for another year. The bullish outlook for tight stocks and high price for December ’09 futures has vanished.
On Hold
The need to buy more cotton acreage next season has been placed on hold until at least 2010. Cotton acreage will fall far below 9.4 million planted this year in the U.S. to probably the lowest acreage since 7.8 million in 1869.
If the U.S. carryover stocks next August are around 7 million bales, a harvest of some 13 million bales will suffice. Based on current yields and abandonment, a crop of that size could be produced on less than 8 million acres.
Exports have slowed in recent years. Combined production in India, China and other foreign countries has increased faster than demand. World cotton yields averaged 582 pounds per acre 5 years ago. Today, yields average about 700 pounds, a 20% increase.
Therefore, fewer acres are needed in the U.S. and foreign countries for production to stay near consumption.
Fortunately, strong corn, soybean and wheat prices offer a viable alternative for many U.S. cotton growers. The shift from cotton to alternative crops will likely continue until price increases substantially.
However, Texas is expected to represent more than half of the U.S. cotton acreage for the next several years. Soils across over 4 million West Texas acres are especially favorable for producing good yields and high quality cotton with a limited amount of water. Yet, this soil is not as suitable for growing grain.
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