December 13, 2013
Somewhere in China—either out in the open, maybe covered, maybe not, or possibly stored in warehouses—some 45 million to 50 million bales of cotton wait to hit the world market and send prices plummeting.
Just the fact that the cotton exists has already made markets nervous and show signs of weakening price prospects for 2104 production.
“Old crop cash prices, Memphis or Dallas, should be around 80 cents a pound next summer,” says John Robinson, Texas AgriLife Extension cotton marketing specialist at College Station. “The new crop appears already to be discounted, assuming some action by China. If China auctions off a lot of cotton, prices could drop even more.”
Robinson offered this less than rosy outlook during the cotton break-out session of the 25th annual Texas Plant Protection Association Conference Dec. 11 in Bryan.
China created this mess in 2010, when cotton rose well above $1 a pound. Robinson said the Chinese government bought a lot of its own cotton at $1.40 per pound. They also stockpiled cotton from 2011 and 2012, banking on the prospect of continued high prices. Instead, cotton dropped well below $1 a pound, so China kept its own, high-priced cotton in the warehouse and began importing cotton to fill mill demand.
Keeping that cotton off the market has buoyed prices for the past two years. “Prices are higher than they should be,” Robinson said. He calls the market “distorted. And China is the number one distorting factor.” They also could reduce cotton imports.
Speculators also play a role, as they get into and out of cotton on “decisions that follow things that have nothing to do with agriculture.”
He said the Federal Reserve’s efforts to stimulate the economy by buying bonds also may affect cotton. If the fed cuts back on stimulus, funds may drop out of the commodity markets and cotton prices could drop.
“The general economic outlook also affects cotton,” Robinson added. “When consumers feel good, they tend to buy clothes. Now, we don’t see a rip-roaring economy, although it has gotten some better.”
All those elements suggest the market will “expect weakness in 2014.”
Cotton supply is adequate. U.S. ending stocks did not change this year, “but world ending stocks are at a record high. Recently, U.S. stocks-to-use ratio is tightening, but prices are not rising,” Robinson said. That goes back to China and their huge stockpile.
“A big chunk of the highest carryover ever is in China. With that carryover, prices should be lower, but China has created an artificial shortage and has artificially constrained the supply.”
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When that Chinese reserve comes onto the market, and Robinson said that is going to happen, prices will fall. The current sideways trading pattern –70 cents to 80 cents—will not be sustainable. He suggests that futures prices could hang near 70 cents. Farmer cash prices would be in the upper 60-cent range.
Robinson expects U.S. cotton acreage to increase slightly with Texas adding from 500,000 to 750,000 acres in 2014.
“Grain prices are coming down, so cotton acreage could rebound some.”
He said with the potential for a weaker market, cotton farmers might consider taking some price protection measures before planting, especially if they have irrigation or are looking at favorable moisture conditions, though he admitted that forward pricing may be a hard decision following three straight years of devastating drought.
He also expects India to plant more cotton in 2014.
Whatever the acreage, and however the U.S. crop fares, the one factor that matters most will be China. Prices will not move up unless China does something drastic.
“And even if we see a huge price rally, China will release that reserve,” he said. And prices will take a hit.
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About the Author(s)
Senior Content Director, Farm Press/Farm Progress
Ron Smith has spent more than 40 years covering Sunbelt agriculture. Ron began his career in agricultural journalism as an Experiment Station and Extension editor at Clemson University, where he earned a Masters Degree in English in 1975. He served as associate editor for Southeast Farm Press from 1978 through 1989. In 1990, Smith helped launch Southern Turf Management Magazine and served as editor. He also helped launch two other regional Turf and Landscape publications and launched and edited Florida Grove and Vegetable Management for the Farm Press Group. Within two years of launch, the turf magazines were well-respected, award-winning publications. Ron has received numerous awards for writing and photography in both agriculture and landscape journalism. He is past president of The Turf and Ornamental Communicators Association and was chosen as the first media representative to the University of Georgia College of Agriculture Advisory Board. He was named Communicator of the Year for the Metropolitan Atlanta Agricultural Communicators Association. More recently, he was awarded the Norman Borlaug Lifetime Achievement Award by the Texas Plant Protection Association. Smith also worked in public relations, specializing in media relations for agricultural companies. Ron lives with his wife Pat in Johnson City, Tenn. They have two grown children, Stacey and Nick, and three grandsons, Aaron, Hunter and Walker.
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