Relative prices (Dec’21 CBOT corn/Dec’21 ICE cotton with a ratio of 5.8 as of early January) still suggest between 12 and 13 million acres of U.S. all cotton in 2021, based on history (see Figure 1).
I think it’s safe to assume that the influence of soybean prices are indirectly reflected in this historical corn/cotton price relationship. But new crop soybean futures over $11/bu may be more directly influential in the Midsouth and Southeast regions. For example, net returns projections based on Arkansas costs and yields give a slight advantage to planting corn and soybeans over cotton, as of early December.
Similarly to southern soybeans, strong sorghum prices in Texas could switch some acres to sorghum, possibly even under some irrigated circles in the High Plains. Sorghum cash prices are about a dollar premium to corn, and sorghum’s water demand is less than corn. So, with expectations of hotter/drier growing conditions, more growers may turn to sorghum. Sorghum is also a cheaper crop to finance compared to corn or cotton, so the banker’s influence may creep in.
More generally, grower’s crop planting decisions can be influenced by recent experience. Analysts frequently assume that growers react to conditions from the previous year, and statistical models of acreage back this up, e.g., the levels and trends of last year’s prices often correlate with this year’s acreage outcome. With cotton these lagged effects may be a little more complicated, however. In 2020 we saw cotton prices crash, followed by an amazing recovery and extended rally.
By the same token, relatively new cotton producers in regions like the Texas Panhandle have had some tough experiences in terms of cotton yield and quality in recent years. It remains to be seen how this recent experience might weigh against planting more cotton in the newer growing regions. The same may be true in some of the more hurricane-damaged regions in 2020 (Alabama, Florida, Georgia, and Louisiana).
Two other complicating factors include the spreading extreme drought conditions in the High Plains, and the influence of crop insurance. Texas growers with established cotton yield history commonly respond to extreme drought by planting more cotton. Under dry conditions, cotton can agronomically out-perform grain crops if you wind up with anything to harvest. And cotton often pencils out better as an insurance claim if there is a crop failure. However, the latter is less of an influence in some regions like the Texas Panhandle with less cotton yield history.
So, there you have it: relative prices, water demand, last year’s experience, this year’s financing, drought, and insurance. Where will cotton acres be in 2021? The annual Cotton Grower magazine survey of grower intentions, circa late fall, suggests a small decline in U.S. cotton acreage, year over year. That is believable given the mixed influences discussed above. The next milestone is the National Cotton Council’s survey (reflecting New Year intentions, released in early February).
A year-over-year reduction in plantings, coupled with drought conditions in the Southern Plains region, and hopefully recovering demand may lead to a price supporting reduction in U.S. ending stocks.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.