Shurley on Cotton: Looking Back at 2015 and Ahead to 2016
January 13, 2016 By Dr. Don Shurley
The New Year has not started off well for cotton. Old crop March futures currently stand at roughly 62 cents and new crop December futures at roughly 63 cents – both down two to three cents from the most recent high.
On the decline, cotton prices reached the lowest levels since October. This raises concerns, as it should, but this recent decline is likely short-term. That doesn’t mean the outlook is rosy. It just means the market can likely recover this two to three cents.
Concerns about the global economy, China, and related losses in the U.S. stock market drove cotton prices down. Prices have since tried to recover somewhat, but slowly. The upward trend we’ve been in since October has now been broken, so there’s work to do to repair last week’s damage.
USDA released its January production and supply/demand figures on January 12. The 2015 U.S. crop was lowered slightly to 12.94 million bales. U.S. mill use was lowered 100,000 bales, from 3.7 to 3.6 million bales. U.S. ending stocks were raised by 100,000 bales.
As expected, 2015 foreign production was lowered roughly 2.0 million bales. The China and India crops were each lowered 500,000 bales, and the Pakistan crop was lowered 800,000 bales.
World mill use for the 2015-16 marketing year was lowered 450,000 bales. This makes the seventh consecutive month that World use has been revised downward. Use (demand) now stands at only .5% above (or essentially unchanged) from the 2014 crop year and still less than 1% above the 2013 crop year.
Demand growth, or this lack of it, is going to be a key factor in the 2016 crop price outlook. There is already a belief among many in the industry that U.S. cotton acreage will increase this year. Compared to 8.58 million acres planted last year, early expectations for this year range from 9 to over 10 million acres.
For the U.S. cotton grower, relative prices for alternative crops are not as favorable compared to cotton as in 2015. Also, for peanut growers, acreage expanded in 2015, but may not be sustained for 2016 due to rotation constraints.
If U.S. and World area and production increase in 2016, this will place price direction squarely on the shoulders of demand. That seems to be a risky proposition at this juncture, given the aforementioned downward revisions in demand this season.
Of course, acreage harvested and yields are more critical than acres planted. U.S. yield was down in 2015 compared to 2013 and 2014, but abandonment was very low at only 6%.
For the 2015 crop, U.S. cotton benefited from a strong basis and good premiums for fiber quality. This was important in profitability and will be important for 2016 when considering alternative net returns and what to plant. There are no guarantees that strong basis and quality premiums will continue, but it is something to consider. Both yield and fiber quality are important goals to shoot for.
Changes in STAX are forthcoming, and any other policy changes – such as the cottonseed designation for ARC/PLC, if implemented – will also come into play for 2016.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia
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