John Robinson
Texas AgriLife Extension eocnomist John Robinson discusses the cotton market at the Red River Crops Conference.

Cotton market in 2017: Expect more of the same

Cotton prices have improved but not enough to cover all production costs. The industry is watching to see if President Trump's promised trade changes will affect markets.

To get a good idea of what the 2017 cotton market is likely to offer, try to recall what it offered in 2016, says John Robinson, professor and Extension economist, cotton marketing, at Texas A&M AgriLife Extension Service, College Station.

“What we’ve had is what we’re going to get more of,” he said at the recent Red River Crops Conference at Childress, Texas. The world cotton supply is shrinking, he says. “We’re making progress, we’re whittling down supplies — but we have a long way to go.”

The $2 cotton run-up in2010 “distorted the market, and China kept it distorted” by buying and storing a lot of that high-priced cotton, while continuing to support internal cotton prices at $1.40 to $1.50 per pound.

“Cotton production for 2016 was down, and that was good,” Robinson says, “but demand is still slow. Most of our cotton is exported, and becomes apparel or home furnishings. People buy cotton products when the economy is good.”

The world economy has improved some, but “flat, slow growth remained in 2016 and will continue.” He wonders about The Trump effect. “We see some optimism with a business-friendly administration. If he cuts taxes, we assume consumers will have more money in their pockets, and we hope they go buy clothes. But prospects of tax cuts come with a lot of ifs.”

A COOPERATIVE CONGRESS?

Spending on infrastructure is another of President Trump’s campaign pledges, Robinson notes. “That sounds like deficit spending — but in periods of deficit spending, commodity markets perform better. There are still a lot of ifs.” A big one: “Can Trump get his programs through Congress?”

The 2016 cotton market was not all flat, he points out. “We saw some summer rallies. We saw some expansion of demand, and cotton reached 70 cents. It’s still selling.”

In prior short-term rallies, he says, cotton would bump up and mills would quit buying. The price would fall and they would start buying again. “We are seeing a shift in demand — but not much.”

U.S. quality has been a factor, he says. “Mills have been buying quality, and the U.S. has the best quality cotton in the world. We had an excellent crop and a good harvest season in West Texas — good yields and good quality, including color and strength. Exports are up because of quality.”

A puzzling decision by a major competitor also offered an opportunity for U.S. cotton, Robinson says. “There is no love lost between India and Pakistan, and for some reason India cut off cotton exports to Pakistan. The U.S. exploited that opportunity.”

India also took a “huge chunk of cash out of circulation, leaving gins without cash and no way to pay for cotton. The economy ground to a halt. Will that disruption continue? I doubt it.”

TRADE ISSUES

Another aspect of The Trump Effect may factor into the cotton market, he says. “During the campaign, we heard a lot of saber rattling over trade issues with China and Mexico — both important to U.S. cotton exports. We hope cotton doesn’t get caught up in a trade war. If that happens, it will not be until next year, but it is something to watch. We have strong exports now, but I’m not sure that will continue.”

China may offer a bit of a bright spot, for a change, Robinson says. “They had a 60 million bale surplus, bought at high prices. That situation is being resolved.” China made something of a half-hearted attempt in 2015 to auction off some of that surplus cotton, but priced it too high and with little transparency in timing the sales. No one bought it.

 In 2016, they changed tactics, set up more specific auction dates, and offered the cotton at more reasonable prices. “They sold 12 million bales out of 60 million,” he says, “That’s a lot of cotton, and the market didn’t tank. Instead, it actually went up. I was surprised.”

He thinks China will follow that same strategy again this year, a transparent auction to move more of the surplus.

Other factors affect cotton prices, he notes. “The strong dollar is a headwind in the cotton market. It makes it more costly for foreign mills to buy U.S. cotton. It was that way last year, and it may continue. It’s a headwind, but it’s not a market killer.”

Speculative buying also affects cotton prices, and is currently propping up the market, Robinson says. “Speculators are buying record high positions, about 1 million bales of futures contracts. But they can get in and out of the market in a hurry. Speculators gave us our highest prices last year in July and August, when cotton went to 78 cents.” They can also tank the market if they get out suddenly.

A WEATHER MARKET?

Robinson thinks 2017, like 2016, could be a weather market. Some areas are currently dry as planting season nears. “I expect a hot Texas summer and increased cotton acreage — that gives us a good opportunity for a weather market, and speculators will be watching it.”

Mill fixations could move the market this spring, he says. In April and May, market buying could result in short-term higher prices. “That could pull up old crop prices, and maybe December cotton. But be prepared to act quickly. Be nimble —the effect will not last long.”

Overall, Robinson expects the supply/demand situation for 2017 cotton to be much the same as 2016. He anticipates 11.5 million acres planted, with a 20 million bale supply, and 5 million bales in ending stocks. With those numbers, he says, price should hold around 65 cents to 69 cents. “If yields are higher — up to 800 pounds per acre average — we could add 1 million bales easily, and prices could go down. Conversely, we could make a short crop and see price go the other way.

“But I expect more of the same for 2017, with prices ranging from the low 60s to the high 70s. It could go to 80 cents, but if it does it won’t stay there. If it goes to 75 cents, it won’t stay long. The slow demand won’t sustain those prices.”

Polyester is too cheap for cotton to maintain a higher price, he says. “At 75 cents, with polyester in the mix, we won’t see many buyers. I do expect a range of 63 cents to 78 cents. But in-season volatility remains possible, spurred by politics of trade, weather, China’s supply, and the strong dollar.”

He suggests looking for pricing opportunities and using forward contracts — especially if basis is favorable — to lock in “some fraction of the average production history yield. During price rallies, shop for put options or put spreads,” tools he says that are relatively cheap — a few cents per pound.

Growers should also take time to study the many options available with multi-peril crop insurance, Robinson says. “It’s a complicated process, and it’s hard to know what’s best, but producers need to take time to sit down with insurance agents.” And he noted, “they don’t have much time” to do that.

Another possibility is to work with a crop insurance decision tool available through the Texas A&M Ag Food and Policy Center (https://decisionaid.afpc.tamu.edu/).

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