The cotton market is turning its focus to USDA's first objective yield survey of the season coming Aug. 11. According to one analyst, if USDA's U.S. cotton crop estimate comes in at 20.2 million bales, the marketplace is going to settle down a lot. If USDA says it's 19.6 million bales, there'll be a lot of support for higher prices.
Anthony Tancredi with Allenberg Cotton Co., Memphis, says if the crop size comes in at the low end of the range, the market will anticipate a cotton crop that deteriorates with each successive crop report, “and the market is going to take off.”
Much of the production decline is due to drought in Texas and other areas. After record-setting production in Texas the past two years, this year's Texas crop is shaping up to be one of the worst. Texas cotton yielded 8.44 million bales in 2005, but half that harvest amount is predicted this year.
The scenario is much like the one caused by the 1998 drought, only the weather and crop conditions appear to be worse.
“It's just going to be a huge drop from the previous year,” said John Robinson, Extension cotton marketing economist, Texas A&M University.
For two years in a row, U.S. cotton producers have produced chart-busting yields and record production. The market began to wonder if a new yield plateau for cotton had been established. Worry set in that if average yields had indeed increased, the United States could suddenly start growing a lot of cotton every year.
“People started becoming very bearish price in cotton, thinking we would not be able to keep up with it on the consumption side,” Tancredi said. Then came some unexciting times for cotton prices.
But things can change in a hurry.
World production estimates for this year's crop range from a high of 119 million bales to a potential low of 104 million bales. While those numbers alone can move prices up and down considerably, it's the demand base that is really creating the excitement under the market.
World consumption of cotton, already outpacing world production, is expected to grow by as much as 5 million bales per year over the next few years.
This is going to require annual global production of over 120 million bales a year, something that has been accomplished only once. If it isn't reached, stock will decline and something will have to give.
The only question not yet answered is whether or not the global consumption explosion is a cyclical usage pattern, according to Tancredi. “The pattern is that consumption shoots up and goes sideways for a while, then shoots up and goes sideways again.”
But Tancredi doesn't believe it's happened just yet. “Our anticipation is that we will continue to see a growth rate bigger than people expect.”
With USDA projections of lower 2006-07 stocks and a possible 5 percent to 7 percent reduction in the domestic stocks-to-use ratio, Robinson said, the potential is ripe for December 2006 futures to trade higher than the December 2005 contract. Those contracts peaked in the upper 50-cent range.
“I think it's reasonable to see the December '06 contracts reach the low 60s, with the biggest caveat being on the demand side.”