(Sixty percent of San Joaquin Valley cotton acreage will be planted to Pima cotton varieties once again this season. California is the leading Pima producing state in the U.S. Arizona, New Mexico and Texas make up the rest of the U.S. Pima belt. Prices have reached $3 per pound on the world market for ELS cotton. This is a report from Supima about the phenomenal run-up in prices and what the future might hold.)

There have been more news stories in the international press about cotton in the past 12 months than there have probably been in the last decade. Publications from the Wall Street Journal, Economist, New York Times, etc, have had stories about the supply/demand situation and the rapidly escalating prices of cotton this past year. Inquiries from those that know or care nothing about cotton are asking about cotton because they have seen the news.

The stories have focused on the more widely used Upland cotton and talked about worldwide production declines at the same time when demand began to increase. Someone described it as “The Perfect Storm.”

This might be true for Upland cotton, but what has occurred in the Extra-Long staple cotton industry was something that many people saw coming.  Perhaps not to the extent in price increases, but there were lots of warning signs that when demand returned, there would be a limited supply of ELS cotton available.

For the three-year period from 2005-2007, worldwide production of ELS/LS cotton averaged 3 million bales per year. For the past three years beginning in 2008 and ending with the 2010-2011 crop, total ELS/LS production averaged only 2 million bales per season. This amounts to almost a 40 percent decline over this three-year period.

There is not going to be a quick solution to the tight worldwide stocks of ELS cotton.  The stocks-to use ratio in producing countries is estimated to have declined from 17 percent in 2009-2010 to only 14 percent in 2010-2011, probably the lowest in history.

Even though projections are for an increase in ELS acreage in the USA, American Pima cotton will still be in short supply.  As of this week, 268,000 bales or about one-third of the expected new crop production has already been committed for export. 

High prices likely will remain

Tight supply and high prices are likely to remain for the 2011-2012 season and into 2012.  This will happen unless Egypt and China are able to increase production significantly. Early reports indicate Egypt might increase by 30 percent to 35 percent However, because of recent political developments, will there be more pressure to produce food crops?

Production increases in China are anyone’s guess, but any increase would probably be small.  Even with an increase of 35 percent in worldwide ELS production, there will be tight supplies going into the 2012 year. This means continued strong prices.

On a more immediate note, the latest cotton production report by the USDA–NASS indicates the U.S. production estimate for American Pima during this marketing/crop year at approximately 497,500 bales.

Also this month, the USDA – Foreign Agricultural Service (FAS) stated in the export sales report on Feb, 25, that export sales had reached a level of 497,700 bales. This is virtually the same level of the previously reported production estimate.

From the export sales report, a total of 278,900 bales have already been exported and 218,900 bales are yet to be exported.

The USDA – World Agricultural Outlook Board (WAOB) also released its U.S. Supply and Use Estimate for U.S. cotton. In that report, beginning stocks are estimated to be 18,000 bales. Added to the production estimate, this places total supply of American Pima at approximately 516,000 bales. However, the latest USDA–WAOB estimate only predicts that 470,000 bales will be exported this year and that 35,000 bales will be used domestically for a total consumption estimate of 505,000 bales. Allowing for the additional 10,000 bales of unaccounted stocks, ending stocks for the 2010-2011 crop are forecast to be 20,000 bales.

While the U.S. is still about two months away from the prime planting season, industry forecasts are predicting that plantings could result in a crop that could be about 850,000–900,000 bales. While this number represents a potential production record for American Pima cotton (the previous record was set in the 2007-2008 crop at 852,000 bales), supply of that cotton is already tightening for a number of reasons.

Current Pima crop sold out

With the current crop virtually sold out, no new supply of American Pima cotton will be available to spinners until the 2011-2012 crop is harvested in November this year.

If spinning mills were unable to secure enough cotton to meet their demand through November of this year, then there will be early pressure on new crop cotton sales as mills will want to ensure that they are able to secure early shipments of the new crop. This seems to be the case already as 267,700 bales of the new crop have already been sold.

This situation puts additional pressure on the supply side as it is foreseeable that about 30 percent of the new crop will already be sold by the time plantings start. With most new crop sales probably booked for prompt shipments and for top quality cotton, merchants are going to become ever more hesitant to offer bales for sale into the market as they themselves will not be willing to take on more risk on a yet unplanted crop and uncertainty about production and quality.

Additionally, with most of the early sales for prompt shipment, that means any spinning mill coming to the market now will be looking at cotton from a purchase made today, potentially not making it on a vessel for shipment until February/March of 2012. As mentioned earlier, a total of 278,900 bales had been shipped of the current crop as of Feb. 25. That number is very similar to the quantity of bales that have already been sold for the new crop.

As this tight supply situation continues to play out, it is having a significant impact on prices. Quotations from Cotton Outlook for American Pima prices had risen to a level of $3.05 per pound on a CNF Far East basis before the quotation was dropped from the daily report; presumably because supply has basically run out.

For the new crop quotation, Cotton Outlook’s recent report places the American Pima quotation at $2.25 per pound already up from $1.70 per pound starting point at the end of last October.

Even with prices having set new record highs, demand for American Pima and ELS cotton continues to remain consistent. Weekly sales continue to register sales of approximately 10,000 bales per week for the current crop and slightly more for the new crop. Now with the current crop basically sold out, the focus will shift more squarely upon the 2011-2012 crop and its tightening supply.