Shurley on Cotton: On the Ropes, But Trying to Hold On
By Dr. Don Shurley
The past few weeks have not been kind to cotton.
Prices (December15 futures) have broken down through that important “trend of increasing support” line and have threatened to move lower. Some analysts believe we are headed to the upper 50s. But thus far, cotton has fallen mightily but trying is to hold on.
Today’s (August 12) USDA numbers may act like the referee stepping in to stop the damage just in time.
Cotton has been hit by a barrage of negative news lately, and one has to wonder how much longer prices can hang on. The January low close at 61.50 has been threatened. If prices can manage to stay above this January low, it will be a positive sign to say the least. Breaking through this “floor” could really get the bears roaring and send us even lower.
Today’s numbers don’t solve all of cotton’s ills, but they may keep the roaring bears at bay for now. The way this market has been going, we’ll take all the help we can get.
I have long said that one cure for falling prices is buying. It is thought that this move lower – now and if/when it happens again – may result in increased buying/exports. Perhaps that will provide the new support needed to keep prices from moving even lower and will eventually push prices a bit higher.
Prices will be driven by U.S. crop conditions and outlook, China and global economic concerns, and exports. The new USDA production and supply/demand numbers are a largely unexpected shock and should provide some boost and support for prices, even if it may be short-lived. December15 is up almost 300 points (almost three cents/lb) on the news.
USDA’s August estimates (also released August 12) are the first numbers for the new crop year based on an actual producer survey. The U.S. crop is now estimated at 13.08 million bales – down from the previous estimate of 14.5 million bales. Most expected the crop to be larger, not smaller, than 14.5 million.
U.S. acreage planted was reduced from 9.0 to 8.9 million acres and, more importantly, acres to be harvested was dropped 610,000 acres. Average yield is expected to be 795 lbs/acre – down from 819 lbs in the July estimate.
As expected, exports from the 2014 crop year were increased another 200,000 bales. There was a 100,000 bale reduction in the 2014 crop year beginning stocks and a 200,000 bales increase in the “unaccounted” number. So – in a bit of a surprise – U.S. beginning stocks on hand going in to this 2015 crop year were lowered a rather significant 500,000 bales.
This half-million bale decline, plus the reduced U.S. new crop estimate, cuts total available U.S. supply by almost two million bales. But not all was good for prices, as expected exports for the 2015 crop year were lowered 800,000 bales. This reflects less available supply and concerns about China and their need for imports.
The U.S. average price of cotton for the 2015 crop was increased from 62 cents (a range of 54 to 70 cents) to 65 cents (a range of 58 to 72 cents).
The expected 2015 crops in both China and India were reduced. Total World production is now estimated at 109 million bales – down about 2.5 million bales from the July estimate. World usage is estimated at 114.65 million bales – up slightly from July, despite a half-million bale reduction in China’s expected use. World 2015-16 projected ending stocks were reduced three million bales, with China down a half-million bales from the July estimate.
There’s something inconsistent about the recent slide in prices and the increase in expected price range for this year’s crop. Today’s numbers, judging strictly by the market’s reaction, should provide some breathing room and a little relief from the bearish pressures. But there are still many unknowns and pitfalls. There are growing concerns about China’s economy, and, this week, the People’s Bank of China decided to devalue the Yuan.
For now, these numbers are like the referee stepping in and getting cotton off the ropes. But the fight continues. As we progress to harvest, prices will depend on any further revisions in the U.S. and foreign crops and the prospect for exports. Premiums for fiber quality are still expected to be good.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia