In the first positive report for cotton producers in months, USDA decreased cotton production for the 2012-13 crop and increased exports in its World Agricultural Supply and Demand Estimates, released Dec. 11. The department also decreased global ending stocks, the first reduction in months.
"My overall assessment of the report is that it was a move in the right direction," says John Robinson, agricultural economist with Texas A&M University. "This report broke a string of record-high levels of world ending stocks, but we still have near record-high levels of surplus cotton in the world."
Looking at the U.S. numbers first, USDA reduced its estimate for cotton production by 190,000 bales to 17.26 million bales. A large reduction in Texas was partially offset by increases in production in the Southeast and Mississippi Delta. At the same time, USDA raised exports by 200,000 bales to 11.8 million. The decline in production and increase in exports pushed ending stocks 400,000 bales lower to an estimated 5.4 million bales, which is equal to nearly 36 percent of total use.
USDA tightened its marketing year average price forecast for cotton to 65 to 71 cents per pound by increasing the price a penny on the low end and decreasing it a penny on the high end of the range.
USDA lowered global ending stocks of cotton to 79.64 million bales, down from November’s estimate of 80.27 million bales. Stocks are substantially higher than they were two years ago, when global ending stocks were only 48.93 million bales.
"It was a friendly WASDE, but there is still a huge amount of cotton that will need to be worked through," says Robinson.
Insatiable Chinese Demand
China alone has 37.6 million bales of cotton in inventory. "A majority of the 37 million bales is owned by the government. It’s off the shelf, and out of circulation," says Robinson. "And that is creating an artificial shortage." He estimates that were this cotton suddenly free to be traded, U.S. cotton prices would be about 30 cents per pound lower, based on historical comparisons.
The Chinese government’s decision to keep the cotton off the market is positive for now, but eventually that product will have to move into the market. The question is whether China will dribble it out slowly so as not to impact price dramatically, or wait for a shortage to develop in India or the United states and then bring it out for sale, which would temper a price rally.
USDA also raised world cotton production by 70,000 bales, due to increases in several West African countries, which more than offset reductions in Australia and the United States. USDA raised world trade in cotton by 1.1 million bales due to expected higher demand from China, India, and Vietnam. "It now appears that two-thirds of China’s 2012 crop may be purchased for the national reserve, constraining supplies available to mills," says USDA in the report.
Looking ahead to planting season, with drought still gripping the southern plains, cotton could be the only option for growers unless precipitation increases soon.