El Niño conditions refer to a warming of the equatorial Pacific waters, which results in altered weather patterns around the world. After much focus during the 2014 season, we never saw the development of strong, persistent El Niño conditions. But now the issue has arisen again, and again has potential to influence the cotton market forecast.
El Niño events can significantly affect cotton production by changing the pattern of moisture and temperature. For the U.S., El Niño events that occur during the growing season are associated with increased moisture, lower abandonment, and higher cotton yields. This is particularly notable in dryland and deficit irrigation regions like West Texas and South Texas. Two examples of El Niño years cotton growers may remember are 2007 and 2010. Those years were associated with an average U.S. cotton yield of 822 pounds per acre, as well as the historically low 3 percent abandonment rate. On the other hand, El Niño conditions are associated with droughts in the cotton growing seasons of Australia and sub-Saharan Africa, as well as below average monsoon rains in India.
As of mid-March 2015, NOAA indicates that we are currently experiencing the warmer Pacific water temperatures that are officially classified as El Niño conditions. NOAA also forecasts a 50 percent to 60 percent chance that these conditions will continue in the Northern Hemisphere through the summer of 2015. The Australian Bureau of Meteorology is similarly forecasting a 50 percent chance of El Niño conditions in 2015. The Indian Meteorological Department is taking a wait and see attitude.
NOAA’s El Niño forecast is reflected in their March—May forecast of wetter-than-normal conditions from Arizona to Texas (and also from Florida to South Carolina). How might this influence cotton prices? Right now, USDA and many others are forecasting a neutral outcome for cotton ending stocks and prices. That means they expect the ending stocks from the 2015 crop to be similar to those from the 2014 crop, suggesting that new crop prices will likely follow in the footsteps of old crop prices.
USDA’s neutral outcome for stocks assumes a trend yield of 800 pounds per acre, and 13.4 percent abandonment. The historical implication for cotton prices in a neutral stocks year is shown by the black price line in Figure 1. This is the average of five years of December cotton futures contracts in years where the outcome for ending stocks was neutral. It shows a flatter trend, with only minimal harvest-time price weakness.
To my way of thinking, the moisture that we’ve already seen, coupled with the possibility of El Niño conditions, is enough to consider either higher yields (e.g., 820 pounds per acre) or lower (e.g., 10 percent) abandonment than USDA is currently projecting. Either of those would give us an additional 500,000 bales over USDA’s current production estimate, which would push the outlook for ending stocks to “neutral-plus.”
Lastly, consider if we had a strong El Niño scenario similar to 2007 or 2010 (which, to be clear, is not what NOAA is currently forecasting). If we had both 820 pounds per acre yield and 10 percent abandonment, the result would be one million bales above USDA’ neutral outcome. Such a stocks outcome suggests more pressure on prices, with the seasonal weakness starting in May and dropping more after September (Figure 1, green line).
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