A year ago this winter, the main question that would determine the course of cotton prices for the coming year revolved around China’s cotton reserve policy. Fast-forward to the winter of 2015 and we have a few answers to that question, though the big picture remains unclear. Uncertainty the last couple of years has been the culprit of binding prices in a range. Over the course of the last few months, however, some of that uncertainty has been resolved; the only problem is the partial unearthing of the great Chinese mystery has had a negative effect on cotton prices.
While China is still adding to its cotton stocks, it has instituted a myriad of policies that incentivize domestic mills to buy Chinese cotton rather than look to the world market. Every bale of Chinese cotton consumed by Chinese mills represents a one-bale decrease in export demand for the rest of the world—and there is a lot of Chinese cotton to be consumed. Recent USDA projections estimate that China will own 62 million bales of the 107 million bales in world ending stocks in 2015, a record.
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Last year it was postulated that a change of course in China’s cotton reserve policy could take as much as 10 cents off the board. This has partially come to pass. The additional slice off the market comes from a stronger-than-anticipated 2014 U.S. crop, the expectations of which began to take hold in May and June with rainfall in the Southwest. From an initial bearish outlook, Dec. `14 futures peaked in early May at over 84 cents due to news of continued long-term drought. The late spring rains reversed traders’ moisture expectations, effectively removing a “drought premium” from the market, and that is where the slide began.
That is germane to the 2015 discussion because long-range forecasts are calling for a moderate El Nino, which would only serve to bolster yield expectations and expectations of lower abandonment, thus culminating with yet another net increase in U.S. stocks.
Currently, carry-in from the 2014 crop is expected to be around 5 million bales. Taking into account recent wet years such as 2007 and 2010, it is reasonable to expect the 2015 crop to produce around 15 million bales. That would provide for a supply of 20 million bales. With sluggish economic growth and the current trends in Chinese policy, consumption could be assumed about the same as 2014. That would equate to 14 million bales of off-take, which would leave around 6 million bales of ending stocks, up from 5 million in 2014. Barring a significantly short crop somewhere in the world, it is difficult to project an increase in current prices.
The implications for marketing revolve around seasonal price patterns. Typically, prices would peak in March as uncertainty around planting expectations abounds. If this assumption holds, the best opportunities for forward pricing would be in March. For now, look for the 2015 average price to be in the mid-50s to mid-60s range.