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Cotton market hard to figure

It could be said the cotton market has been rather apathetic as of late. “Cotton is the same as other crops in that we have weather factors, but for some reason this year, it seemed like whatever happened, the market seemed not to care,” says Don Shurley, University of Georgia Extension economist.

“There will be a large abandonment in Texas this year, and large questions still remain about this crop. We’ve had various tropical storms to come through — some in the Southeast, and some in the Mid-South and parts of Texas. But the market doesn’t seem to be paying much attention to these factors and is taking a wait and see attitude as far as the supply and demand side go. So the big question is, where does the market go from here? Can it improve?”

We’re just now starting to get the crop in, so we’re very susceptible to weather, said Shurley in late September, speaking at the Southern Regional Outlook Conference in Atlanta. “As we get the crop in, we’ll begin perhaps to see the impact of some of that weather, both on yields and fiber quality. As the crop comes in, maybe the actual cop will mandate some of the concerns we’ve had in the past about this crop. But to date, the market has chosen to neglect those factors.”

Can the market go higher and rally? “Yes — let’s wait and see how the crop actually looks when it gets in,” he says.

Export sales, says Shurley, have been disappointing. It seems as though the only time the United States gets a good run on exports is when prices get low. Then, exports begin moving because buyers want to get the crop as cheap as they can get it, he adds.

Turning to the acreage prospects for 2009, the economist says the relative prices on the futures market now don’t look very favorable. “If farmers have an opportunity to book something really nice as far as corn and soybeans for 2009, and the cotton market is still struggling, it’s ‘lights out’ as far as cotton acreage is concerned. A lot of that depends on what happens in corn and soybean markets over the winter,” he says.

The question of whether or not prices will go higher remains a difficult one, he says. “If we don’t get the demand side turned around, and exports continue to be weak, it could be a problem. If our crop comes in at that 14-million bale level or better, that will keep downward pressure on price.”

Looking at how the market has performed in the past year, Shurley says most growers remember there was a rally in the cotton market in late February or early March, with the price of cotton gaining about 20 cents in a period of a week or two. But this was driven entirely by speculation, he says.

“At the time, the stock market wasn’t doing very well, and as an investor, you didn’t want to put your money there. Oil was already high, so that wasn’t the place to earn a return. Other commodities, including corn and soybeans, were already sky-high. So speculators and investors were looking around for a safe haven. At the time, they saw cotton down in the 70s and that looked as though it might be a good home for my money for awhile. So we had a big run-up in price,” he explains.

This is a great thing if the rally has strong supply and demand fundamentals behind it, but this one did not, he says. “Nobody is going to buy cotton for 90 cents because it’s purely speculative — there’s no supply and demand behind it. If this rally had been driven by supply and demand, we wouldn’t have the problems we’ve had. Folks lost a lot of money, and to make matters worse, it was the kind of price farmers were looking for to make them want to go out and plant cotton, and there were no buyers.”

The price eventually came down to about 75 cents, and everyone said the speculative run-up was gone, he continues. “Then, twice, the market got back up in the 80-cent range and gave us a glimmer of hope that while it wasn’t 90 cents, neither was it 60 cents. At the point, farmers started feeling better about things. But the basis was still wide, and it discouraged farmers from doing anything.

“We got into May, and we still had some farmers who were trying to make that decision. In our neck of the woods in south Georgia, May is a little late to be putting out corn, beans or peanuts. The lack of being able to get contracts really pushed guys the other way. This kind of action has been detrimental to the industry. Not only does it push farmers into planting other crops — and we have seen that happen since U.S. acreage has been down 39 percent since 2006,” says Shurley.

On the other hand, he adds, cotton yields have been extraordinary.

Other factors have worked against the cotton industry, he notes. “Back in January of 2008, the 2007 crop was estimated at about 19 million bales. Also, back in January of 2008, USDA was predicting we would export 16 million bales of that crop, but we actually exported less than 14 million bales. Even though the size of the crop didn’t grow, the exports did not live up to expectations.

“As a result, we ended up carrying two million bales more than we thought we would carry of the 2007 crop into 2008. Exports did not live up to expectations, and we ended up with about 10 million bales — that’s about half a year’s total use carried into the 2008 crop year, so the pipeline is full, and prospects for prices look better, but we have to get some of this cotton out of the pipeline and we’ll be into the winter before that happens.”

It’s projected that by this time next year, the United States will have trimmed five million bales off of stocks, says Shurley. “That’s tightening things up quite a bit, and when you consider that we may have another reduction in acreage next year, that again tightens up this carry-in.”

Looking at global factors, U.S. economic conditions aren’t helping, he says, and use has been down. The combination of U.S. mill use — which is less than five million bales — and exports have been off from the previous five to six years.

“We’re seeing a little bit of a downturn in foreign production. But if you look at it from a world perspective, at least half of this tightening is coming from the United States. But foreign stocks are tightening up. If USDA’s numbers are accurate, 2008 will be the first year we've actually had a reduction in world cotton demand in some time.”

Although the crop was down this year — worldwide and in the United States — the demand side has flattened out, says Shurley. China makes up more than 40 percent of the foreign textile industry, and the United States is supplying roughly half of what China needs to import.

“Seventy percent of U.S. cotton is going to be exported. In 2001-2002, India — in its own textile industry — was using more cotton than it was producing. But in the past three or four years, India’s production has skyrocketed from 10 million bales to about 25 million. They have gone from being a net importer of cotton to producing enough cotton to be a major player in exports. Because seven out of 10 bales of U.S. cotton are exported, that has increased our competition. At the same time, world demand has flattened. India is exporting five or six million bales of cotton at a time when world demand has been flat.”

Looking ahead to 2009, December 2009 cotton futures are roughly 75 cents — about 10 to 12 cents above where the 2008 crop is, says Shurley. “That sounds good, but looking at 2009, if you take a 75-cent December 2009 future, and remove the 4-cent basis, that gives us a price of 71 cents. Looking at variable costs and net returns, 75 cents on futures won’t entice a lot of acres into cotton — at least not in Georgia — compared with other crops. Looking at the net returns on other crop options, we need at least 80 cents to make farmers start looking at cotton, based on where other crops are now.”

The outlook for 2009, he says, is that U.S. acreage is likely to be down again for the third consecutive year. “The best-case scenario is that it stays the same — that markets improve enough to hold balance and keep us where we are now. Tighter stocks should improve prices, but we saw the markets drop 20 cents this year. If and when prices do respond and we get a chance to get something up in the 80s, it probably would be good to pull the trigger.”


TAGS: Outlook
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