Cotton Prices Headed to New Annual Highs Despite Bumper Global Crop

May 12, 2011 09:59 PM

Cotton futures have dropped dramatically, about 25%, since their highs of near $2.10/bale hit earlier this year. But strong demand for cotton will push the new-crop annual average price to a new record high despite anticipated record-high global cotton production. 

USDA’s World Agricultural Supply and Demand Estimates released May 11 show that both U.S. and word ending stocks are on the rise. U.S. 2011-12 ending stocks are projected at 2.5 million bales, 43% above the 2010-11 carryout. Despite that sharp increase, projected ending stocks are the second lowest since 1990-91. USDA pegs the average cotton price for the upcoming crop at a record 95 cents to $1.15/lb.
USDA left U.S. cotton production at 18.1 million bales, unchanged from earlier reports, but says abandonment will be high. Nearly the entire state of Texas, which accounts for more than 40% of the U.S. crop, is battling extremely dry conditions. “Cotton acres are still questionable. Even in the Coastal Bend region, the cotton is not growing well,” says Carl Anderson, extension economist at Texas A&M University.
The area of the state from just south of Lubbock through the rolling plains to Wichita Falls, where about 3 million acres of dry land cotton is grown, is too dry to germinate seed. “We still need a couple of inches of rain before they can plant,” Anderson says. USDA projects growers will harvest 10.8 million acres out of an anticipated 12.6 million planted acres, with most of the abandoned acres likely to come from Texas.
“There’s a huge amount of uncertainty with new-crop cotton,” says Brad Chapman, cottonseed merchandiser with APEX, Eldridge, Iowa. “There are floods in the Delta and dryness out West.” New-crop cottonseed prices moved higher following the May WASDE report. Of the two areas, Texas is of the greatest concern. “We hear it’s tough to prep the ground and there are water restrictions,” Chapman says.

Global outlook

World cotton production is expected to rise to 124.7 million bales, the largest world crop ever, according to USDA. India, China, and Pakistan will account for 70% of the 10.1-million-bale increase in global cotton production. Despite a bumper crop, USDA expects easing supplies along with anticipated global economic growth to boost world demand by 3 million bales. Overall world demand, however, will remain below its peak levels of 2006-07 and 2007-08, USDA notes.
USDA also estimates world trade in cotton will hit 40 million bales, as Chinese demand rises. World ending stocks are projected to increase to nearly 48 million bales, a 13% increase from the previous year, but the stocks-to-consumption ratio of 40%  will remain relatively tight, according to the report.
“Old-crop cotton is tight,” says Anderson, and that pushed prices to unsustainable levels earlier this year. “China started to panic and ran cotton up to more than $2 per pound, then other countries began to bid for what cotton the United States had. The market was probably 20% overvalued.” Current December futures near $1.20 look much more reasonable, Anderson says.


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