The initial benchmark projections of U.S. and world cotton production for the 2015 crop are behind us. While there will still be more revisions to come, one thing seems clear—the small size of the U.S. crop will likely give us an ending stocks outcome similar to, or even smaller than those in 2014. This suggests that prices may remain in the longstanding 60 cent range for ICE futures. If downward revisions occur from recent flood losses in the Carolinas, or if Texas’ harvest weather turns really sloppy, we could see a return of Dec. ’15 futures prices in the 65- to 67-cent range.
For the latest on southwest agriculture, please check out Southwest Farm Press Daily and receive the latest news right to your inbox.
A smaller world crop implies something else, too. Since 2011 there has been a gap of excess world production over consumption (see Figure 1). That gap implies the build-up of world inventories, which include the large government stocks in India and the historically humongous government reserves in China. That so much of these surpluses have been out of circulation has kept prices artificially higher than they otherwise would have been. But this situation has also kept prices range-bound, especially on the upside. Any potential rallies from a serious shortfall in world production would simply have been (and still would be) met with releases of Chinese and Indian stocks.
The current projections from USDA not only represent a closing of the gap but also a whittling down by over five million bales. So, instead of more than 110 million bales of world ending stocks at the end of the 2014 crop year, we might have 105 million bales at the end of the 2015 crop year. An ending stocks of 105 million bales is still a huge outcome, but it represents a step in the right direction. And, the step may even be larger if India really has fewer new crop bales than USDA is currently forecasting.
Still, it will take years to get world supply and demand back into balance. Until that happens, I think prices will be somewhat capped on the upside. Most of the existing old crop stocks are older and likely marginal grade. This suggests a persistent divergence in the market between heavily discounted, poor-average quality cotton (of which there is a huge oversupply) and better quality cotton.
One other observation should be noted about world cotton from Figure 1. The most significant and sustainable aspect of the cotton market is the long run increase in demand. What kept a lot of U.S. growers in the cotton business was the ten year boom in world cotton consumption starting in about 1998. That boom had a lot to do with freer trade agreements and the rise of more competitive textile manufacturing in Asia, as well as a general increase in world economic growth. Farmers and analysts are more used to talking and thinking about supply-related things like weather, yield, and acreage.
Supply side surprises lead to erratic shifts in production, as is evident from the blue line in Figure 1. This usually results in short term price responses. But the longer term rise in cotton prices comes from upward shifts in consumption patterns. Since about 2012 we have been seeing a modest recovery in the upward march of world cotton consumption. Let us hope that this trend continues.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.