A shout out to cotton
If you are unfamiliar with the price move cotton has had over the past year, let us quickly bring you up to speed. From January to March, cotton prices went from 76.00 to 88.00 cents/ pound. Then from March until early August, prices traded sideways between 88.00 and 82.00 cents/pound.
One year ago, the global supply of cotton was so high that the crop became largely ignored by traders as other row crops took center stage. In that time, demand stayed strong and in the U.S., cotton faced a major threat of losing production acres due to the fabulous prices in corn and soybeans. Because of the threat of lost acres, cotton prices rallied during the spring planting time to ensure that Southern U.S. producers would continue to plant the crop.
A Closer Look at the U.S.
U.S. cotton production is projected to be near 13.91 million bales, which is down drastically from last year’s number of 17.315 million bales. Cotton yields are estimated to be near 824 pounds per acre, which is also down from last season’s crop which yielded an average of 887 pounds.
Even though cotton prices rallied this spring, cotton still lost planted acres from last year, which is why production is expected to be down. In addition, a recent USDA weekly cotton condition report indicated that 42% of the crop was rated good to excellent, down from last year’s 45%. However, the poor to very poor category at 26% is large enough that, in our view, downside potential for prices will likely be limited, at least for now.
U.S. inventories should tighten in the year ahead due to smaller acres and dry weather. This ultimately provides long-term price support for cotton into the winter months. On the flipside, however, ample world inventories will be enough to keep rally potential in check.
Global Supply and Demand
While U.S. supplies will tighten, the world numbers still remain more than adequate. In its August supply-demand estimates, the ICAC raised production 2.94 million bales on the month to 117.54 million and cut consumption 1.52 million bales to 110.23 million. Globally, production now is expected to outstrip mill use by 7.31 million bales in 2013-14, up from 2.85 million bales foreseen a month ago, according to the International Cotton Advisory Committee. World cotton carryout still remains high, with ending stocks now estimated at 94.34 million metric tons or an eye-popping stocks-to-usage figure of 85.9%.
Therefore, whatever the case, cotton prices could come under pressure this fall, depending on how the U.S. crop yields because of large global supplies. For now, we expect further sideways trade over the next few weeks. However, be prepared. If the world focuses on big inventories, prices could weaken -- that has been a common theme with the grain and row crop market this year.