For roughly a year and half, cotton futures prices have been supported at an artificially high level by China’s internal policy of stockpiling cotton in a huge government reserve. As of this writing, China had over 45 million bales in their government stockpile. This cotton is out of circulation and unavailable to the market, creating an artificial shortage of cotton.
The outlook for 2014 will be largely influenced by the disposition of these Chinese government reserve stocks. How? If China stops stockpiling and/or starts to consume their stockpiles, it will reduce their import demand for cotton. That would create more surplus U.S. cotton than previously expected, and result in weaker U.S. prices.
No one should underestimate the downside risk and general market uncertainty implied by the potential change in Chinese reserve policy. An unexpectedly large auction of Chinese reserves at market clearing prices would take 5 cents to 10 cents out of the world market in short order; and even if they merely stop adding to the stocks and maintain it at current levels, that alone would represent a price-weakening dip in world consumption.
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So far, however, there have only been a few signals of a change in Chinese stockpiling policy. They have auctioned some reserve cotton, still at artificially high prices, without much market impact. Until we have clearer evidence of any changes to their reserve policy, we will likely see a continuation of range-bound cotton prices, with downside risk and uncertainty, into the 2014/15 year.
Other market considerations involve weaker grain prices, which will focus attention on the level of cotton acres planted in the U.S. and other key producing countries, especially India. There are already some private estimates of an increase in U.S. cotton acreage, as well as in places like Brazil.
The next benchmark is USDA’s Outlook Forum Preliminary Balance Sheet, followed by the March 31 Prospective Plantings Report. From a Texas perspective, I am expecting something like 500,000 to 750,000 more cotton acres planted in Texas. This is not because I think that cotton prices will rally (I don’t) but that feed grain prices are weakening, and winter wheat prices are borderline after falling a lot in 2013.
In addition, a lot of West Texas wheat growers may have a bad taste in their mouths from their 2013 production experience of drought and freeze damage. USDA’s first comprehensive supply/demand report for 2014/15 will be in with their May World Agricultural Supply/Demand Estimates. Later milestones will come in June (USDA Planted Acreage Report), and August (first proven yield estimates from field sampling).
To repeat, the most important and influential variable in determining 2014 cotton prices is the Chinese stockpiling policy. The outcomes for world production are also uncertain at this point, but they are potentially a much smaller influence. I see little to change a price outlook for Dec. 2014 futures to trade mostly between 70 and 80 cents.
The downside risk continues in two cases: (1) China starts unwinding their stockpile more than currently expected; and (2) healthy new crop supplies result from the combination of decent plantings and growing conditions. It makes sense to consider a conservative amount of forward pricing where the production risk isn’t too high. It also makes sense to consider hedging (using put options or put spreads) for cotton held open by growers or marketing pools for post-harvest cash sales.
John Robinson, Professor and Extension Economist-Cotton marketing, Texas A&M AgriLife Extension Service; Jason Pace, Extension Field Economist, Oklahoma Cooperative Extension Service