Shurley on Cotton: Upward Progress Finally Being Made

    Last weekend the National Cotton Council released its annual planting estimates. The expected US cotton acreage for 2015, based on a survey of producers from mid-December to mid-January, is 9.43 million acres–down almost 15% from last season. I think this number is pretty spot on.

    USDA’s first estimate will be out at the end of March and will differ from the NCC number, in part, influenced somewhat by what happens to markets and prices over the next month.

    USDA’s February production and supply/demand estimates were released earlier today. US cotton exports have been doing very well and it was anticipated that the 2014 crop year export number would be revised upward. It was–from 10 million to 10.7 million bales. In a bit of a surprise, US mill use was adjusted down from 3.8 million bales in January to 3.65 million bales. This offsets some of the good news in the increased export number. A source with USDA tells me that mill use is behind pace of even last year and thus the more optimistic 3.8 estimate had to be adjusted down.

    As we all know, what’s really and ultimately more important to the market is crop conditions, expected yield, and how much acreage will be harvested. But in the meantime, it’s still interesting to play around with the numbers……….

    The average US cotton yield for the past 10 years has been 822 lbs. The average abandonment for the past 10 years has been 16%. Applying this to the Council’s 9.43 planted acreage figure would give us an estimated 2015 crop of 13.6 million bales compared to 16.08 million bales for 2014.

    Prices (old crop May15 futures) have rallied from the most recent lows and now stand at almost 63 cents. This is the highest level since the previous “peak” back in December. Export sales have been good and “concerns” are beginning to surface about US stocks continuing to shrink. Today’s revised Use and export numbers dropped US 2014/15 projected ending stocks by ½ million bales. Both the revision in exports and resulting decline in stocks were expected, however, and thus the market hasn’t moved on this news–but this does/should provide continued support and a bit of fuel for improved prices.

    In addition to stocks and the eventual US and foreign crops, as we begin to look forward to the 2015 crop year, the demand side will also come into play. There are many uncertainties here and even though US acreage and production will decline, those uncertainties could keep a lid on prices; but let’s hope 2015 won’t be another 2014.

    New crop prices (Dec15 futures) are currently around 64 cents. We’ve seen a 2-cent gain since the low back in January. What are the chances that prices will eventually improve enough that growers would have incentive to take action of some sort?

    Let’s talk about both the opportunities and the obstacles.

    US stocks to carry-in to the 2015 crop year on August 1 are currently projected at 4.2 million bales. If exports continue strong, let’s assume we reduce this number to 4.0. If we make a US crop of 13.6 as mentioned earlier, that’s puts total supply at 17.6 million bales–940K bales or almost 1 million bales less than this year.

    But, now the difficult part. If the demand side doesn’t grow (currently 10.7 US exports plus 3.65 US domestic use = 14.35 total US offtake), ending stocks for the 2015 crop year would be 3.25 million bales. More importantly, if exports revert back to say 10 million bales, ending stocks would again approach 4 million bales–not much different than where we are now and that’s with an almost 15% reduction in acreage!

    There are a lot of assumptions going on here. We haven’t planted the first acre yet and we have a long way to go. But I think you can begin to see why prices are stuck around 60 cents. There are many uncertainties. What will US and foreign area and production be? Will foreign area decline as the US will? Will China continue to import cotton regardless of what they say about their stocks and policies? India and Turkey also represent unknowns.

    Today’s USDA numbers lowered China’s expected mill use for 2014/15 by 1 million bales. This is not good news. China’s ending stocks were raised by 1.3 million bales. Not good.

    But, let’s end on a more optimistic footing. Beginning in 2010, World production has outpaced Use (demand) for 5 consecutive years. This is what created/allowed the buildup of stocks. But, production has trended down and will likely be down further for 2015. Use, after taking a beating in 2011, has trended up (although today’s revision in China is concerning). Should the uptrend continue, the “gap” between production and use should continue to narrow if not close entirely.

    This should provide some support for prices. I said should. It doesn’t mean prices can’t go lower. They can. It doesn’t mean that prices will move to 80 cents or even 70 anytime soon. But it should mean that prices are nearer the bottom end of their likely range. I don’t expect prices to move anywhere near 70 cents anytime soon; because that would only encourage more acreage and the market is not going to send that signal right now. If you going to plant cotton in 2015, you’ll have to patient and wait for possible rallies this summer. Your worst case scenario will be that 2015 ends up to be another 2014–59 to 60 cents plus POP/LDP/MLG plus hopefully continued good basis and premiums for fiber quality.

    We’ve got a long way to go and this entire discussion is based on a lot of assumptions and uncertainty. Anything can happen. Everything is mitigated and impacted by the burdensome level of stocks.


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