Is the U.S. Out of Cotton?
July 26, 2010 Since the 2006/07 marketing year, U.S. cotton stocks had been largely unmanageable. The stocks-to-use-ratio that year was a bloated 52.82% and growing, exports had fallen by 4.5 million bales (25%) from the previous year, and ending stocks were up 3.4 million bales (55%).
Is there any wonder why planted acreage dropped from 14.9 million in ‘07 to 10.5 in ’08? Except for the price anomaly in March of 2008, the market became the purest form of supply and demand.
While acreage and production were dropping, an improving economy increased demand. Simple mathematics tell you that if those conditions continued, the U.S. would eventually sell out of cotton. And with less than a month remaining in the marketing year that ends July 31, USDA says the U.S. will have only 2.9 million bales in inventory.
Then on June 11, UK-based Plexus Limited said “the U.S. is now for all practical purposes sold out.” But the market was unimpressed and fell 90 points. Or was that really the case? More likely the trade agreed with Plexus but had positions covered in advance.
“Going back to the 1980s, the lowest stocks numbers we’ve had on July 31 has never been below about 2.5 to 2.3 million bales – that’s been the bottom,” said Dr. Gary Adams, National Cotton Council Vice President of Economics and Policy Analysis. “Most of the 2.9 million bales USDA says we’ll have July 31st is committed. In other words, somebody has probably bought it, it just hasn’t been delivered.
“There are always some export sales made in one marketing year that are not delivered until the next marketing year,” he continued. “You have to figure domestic mills want to have at least a few months of their needs covered prior to the new crop starting to come into the marketing channels. It’s not that the warehouses are empty, it’s just that somebody has already bought the cotton in them. “There may still be some under loan and there may be some in grower’s hands ― I can’t imagine it would be much ― but we’re not talking about very much cotton. In essence, if someone came to the U.S. looking for a lot of cotton before the new crop comes in, they would have a hard time finding it,” said Adams. “Again, there’s cotton around, but it’s been spoken for.”
Perhaps no one is more aware of the state of U.S. cotton stocks than Wally Darneille, President and CEO of Plains Cotton Cooperative Association in Lubbock, TX. All told, PCCA will market roughly 30% of all U.S. cotton in the 2010/11 marketing year.
“I can tell you that of what we have in our warehouses, there is less than 2% of their capacity that is not under order. And actually only 5% is on order. So in other words, 93% of it is shipped,” said Darneille. “We’ve been sold out for months.”
Darneille believes that coming up with a ballpark figure of how much cotton the U.S. has in stock is a relatively simple process.
“The USDA says that carryover on August 1 is going to be 2.9 million bales, and between domestic consumption and exports, we’re running at a clip of about 1.4 million per month. So simple math tells you that we’re going to have two months worth of cotton on hand if USDA’s carryover number is right, and it may be too high,” he said.
The earliest chance the U.S. will have to restock on cotton will be in early August, when the first cotton harvests will occur in South Texas. Darneille believes that the majority of the cotton harvested in August and September has been pre-sold and is already accounted for, though.
“New crop sales are double what they were at this time last year. So the idea that the U.S. could run out of cotton, I think that the U.S. is effectively out of cotton already,” said Darneille. “Now do the mills have cotton to run? Probably.”
He believes most mills had already covered their bases in terms of ordering enough cotton to finish out the year. Possible price fluctuations induced by a supply shortage could be shouldered by U.S. mills, Darneille also said, since U.S. mills aren’t willing to look outside the country for cotton. They have grown accustomed to the features of U.S. cotton such as HVI data and reliability of delivery.
“They don’t really want to run foreign cotton, even if it’s a good bit cheaper. I don’t know that many of them would run foreign cotton for 10 cents less. Maybe 15 cents, but I don’t know about 10,” he said.
The last time cotton stocks were this tight was 1994/95, a year that saw cotton prices surge to $1.15 a pound. Without ruling out the possibility, Darneille said he doesn’t foresee prices reacting that strongly to current stock levels.
“There’s a good bit of new crop cotton sold by producers, by cooperatives and by merchants. Farmers, a lot of them don’t want to sell until January anyway. They’ve got the loan, they can put a little cotton into the loan, and get a little bit of money. There’s a little bit of cotton booked forward all over the country, and an awful lot of cotton that’s pre-harvest committed into pools,” said Darneille.
“I think 80% of the cotton out here is committed pre-harvest either on an acreage basis, a bale basis or tied up in a pool. So there’s really no impetus for any of that free cotton to sell before January. So I think between now and the end of the year, there’s just no pressure on physical cotton prices.”
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