Cotton producers attending the recent National Cotton Council mid-year meeting in Memphis, Tenn., should not have been surprised by the less-than-robust U.S. and world cotton market economic numbers presented by Jody Campiche, vice president, Economics and Policy Analysis, NCC. As Campiche went through her report, the impact of the on-going trade war dispute with China — the United States’ most valued export customer for decades — continues to send negative ramifications across the cotton world.
For the 2018 cotton marketing year, the USDA forecast export number of 15.5 million bales missed its mark by 1.3 million bales. “Our domestic mill use was a bit lower in 2018 compared to the previous year, but U.S. mills continue to be the most reliable customers of U.S. cotton,” says Campiche. “With that lower export number, ending stocks increased by 1 million bales in 2018 to 5.3 million bales — the largest ending stock level since 2008.”
USDA forecast a May 2019 mill use number of 126 million bales, but that estimate has since been reduced by almost 3 million bales. “A stronger dollar generally lowers the cost of imports into the U.S. and increases the cost of U.S. exports to other countries,” says Campiche. “We just have a lot of uncertainties caused by the trade war, and now it is disrupting supply chains around the world.”
Current crop situation
The National Agricultural Statistics Service (NASS) made a slight upward revision to its August U.S. planted acreage report, taking it to 13.9 million acres compared to last year’s 14.9 million acres. “NASS is also currently projecting an abandonment rate of 9 percent for the U.S., with the Southwest letting go of more acreage than any of the three other U.S. growing regions,” says Campiche. “That’s really not surprising because they’re rate is almost always higher. Just like the Southwest, Western cotton operations have dealt with drier conditions over the last month and NAAS is now forecasting an 8 percent abandonment rate for that arid region.”
In July, 60 percent of the U.S. cotton crop was rated as good to excellent. That number has since been dropped to 49 percent. “When USDA came out with those August numbers, conditions were better than they are now as we near September,” says Campiche. “Based on current crop conditions, we’re looking at a production estimate of about 22.1 million bales compared to USDA’s estimate of 22.5 million bales. We have to keep in mind, we still have several weeks to go until harvesters start rolling all across the Cotton Belt. If the weather deteriorates, that might very well lower that production number.”
There is another tropical storm brewing in the eastern Caribbean and models vary on its path once it nears the U.S.
“Even with the slightly lower U.S. crop production projections, an estimate of 22.1 million bales would be the third highest U.S. crop on record,” says Campiche. “USDA is also estimating we will have 17.2 million bales of exports this year. The U.S. has only shipped that level of exports one time — back in 2005 when 17.7 million bales were exported. With the current macro-economic situation, I think reaching that 17 million bale number may be very difficult.”
From last August to this June, market share of China’s U.S. cotton imports is half the level observed in the previous decade. The U.S. would normally supply over 45 percent of China’s demand for cotton. “That number has fallen to 17 percent, which sustains that our cotton exports are losing market share,” says Campiche. “Chinese mills are increasingly buying cotton from Australia and Brazil.”
Based on USDA numbers released on Aug. 22, China has the largest number of commitments for the 2019-20 crop followed by Vietnam. “We’re looking at a total commitment of 8.3 million bales at this point of the marketing year, and that’s a very large number,” says Campiche. “That number does include unshipped bales from the prior marketing year and some of those are carryover bales were purchased at much higher prices, so I wouldn’t be surprised if we see some cancellations.”
Campiche knows there is a great deal of uncertainty about world mill use and that leads to uncertainty about stocks. “Can we reach the USDA estimate of 123.1 million bales in this environment? Will they reduce that number as the year progresses? This same scenario happened in the 2018 marketing year,” says Campiche.
Even with the very best scenario of any potential trade resolution, the world would probably be looking at a mill use number from 120 million to possibly 123 million bales. “That would leave world ending stocks in the neighborhood of 82 million to 87 million bales,” says Campiche. “I can see U.S. exports this year ranging from 14.5 million to 17 million bales. If we have a domestic ending stock picture of 7 million to 9.5 million bales, that would still be the highest level of any U.S. ending stocks since the 2007 marketing year.”
Cotton, cottonseed prices
NASS is projecting an estimate of $152 a ton for cottonseed for the 2018-19 marketing year. The Economic Research Service is projecting $154 a ton for that same period. “As we look at the seed cotton program going forward, we will use these numbers in that calculation,” says Campiche. “If we look at the December cotton futures chart and where we are this year, prices have obviously fallen from last year. “Right now, USDA is estimating the average farm price for 2019 to be 60 cents, and that’s with a stocks-to-use ratio of about 45 percent.”
Without a resolution to the U.S.-China trade dispute or any major weather events impact the 2019-20 world crop, Campiche thinks that a higher stocks-to-use ratio could put pressure on prices.