After a wild ride in the past year, cotton markets are relatively subdued and price forecasts are weakening.
“I think the cotton market is in trouble,” says Robin Rosenberg, market analyst at PFGBest, Northbrook, Ill.
Is the trouble big enough to push prices down to the 70-cent range?
“I think we have to see 90 cents first,” says Rosenberg. “I think $1 is becoming a real strong pivotal point now.”
Cotton on the ICE Futures U.S. exchange in New York soared to more than $2/lb. in February and March, but plunged to around $1/lb. by summer and chopped near that level since then.
Meanwhile, drought in the Southwest slashed the estimated Texas cotton crop by half from last year to 3.85 million bales. Oklahoma's harvest dropped by three-fourths to 105 million bales, according to USDA's November Crop Production report.
However, growers increased production in all of the 15 other Upland cotton states in USDA's report. The total Upland crop of 15.56 million bales is off nearly 12 percent from last year's crop. The American Pima crop is up 46 percent and the total harvest is down 10 percent.
“But there are crops in India and Pakistan and they're doing great,” says Rosenberg. “Only problem is, they're not selling too much.”
Global supplies rise
The United States accounts for about 13% of world production this year. USDA's latest global production estimate of nearly 124 million bales is off slightly from last month but up 7.5 percent from last year, continuing on the upward trend of recent years. Projected world production sets a new record, exceeding the previous high 121.8 million bales in 2006.
Global demand projected at 114.3 million bales is off slightly from last month and last year, and is down from more than 123 million bales in 2005 and 2006. Projected global ending stocks this month are up slightly from last month and up more than one-fifth from last year.
Bigger crops bring lower prices
High prices will do their work to curb demand, says John Robinson, economist at Texas A&M University.
In the mid-1990s, prices soared to the $1/lb. range and the 1994-95 season average spot price hit 88 cents per pound.
“Eventually, four years down the road, you saw economics having worked,” says Robinson. “High prices squelch demand and stimulate production. It takes a few years to work through the system. I expect the same now, and I expect a new equilibrium price will not be in the 90-cent range.”
In a few years, says Robinson, cotton prices likely will be back to the high end of the typical ranges of recent decades. Season average farm prices hit an unusual low of 29.8 cents in 2001 and a high point of 75.4 cents in 1995, but the more common range for two decades has been from 45 cents to 65 cents.
“Expect that in the long run, the price will go toward the cost of production in the most efficient places in the world,” Robinson says. U.S. cotton competes with supplies from Brazil and Australia. “In cost of production, we are, with Brazil and Australia, all in the same boat,” he says
USDA projects the 2011-12 average farm price at 84 to 96 cents, down 3.5 to 6.5 cents from last month but still up from 81.5 cents last year and 62.9 cents in 2009-10.
Expect fewer acres
Planting prospects for 2012 may be the next big signals for cotton markets.
“We are entering into a new drought picture,” Robinson says. Forecasters say another La Nina is likely, so the Southwest faces prospects of another season that's dryer and warmer than normal.
“I think Texas producers will do what they did this year – plant 6 to 7 million acres of cotton and see what happens,” he says.
This year, producers abandoned record-high acreage because of drought. Texans planted 7.1 million acres but likely will harvest only 3.2 million of those acres, reports USDA.
“If it had rained a couple of times in May, we would have had millions of bales more of cotton than expected,” says Robinson. “So we're set up for that kind of supply uncertainty.”
A year ago, cotton futures were just starting to climb toward the rally that more than doubled prices. Now, price prospects look less attractive.
“If cotton prices are not above $1/lb. and corn and soybean prices are where they are now, cotton acreage won’t hold in the Delta,” says Robinson. “They’ll go for corn and soybeans,” and Georgia growers likely will favor peanuts over cotton.
“Cotton is financially risky and requires intensive management,” says Robinson. “There's a lot to worry about. It's easier to grow the alternative crops.”
Speculators are scared
Cotton futures are also risky business, says Rosenberg at PFGBest.
“It's an expensive market to trade for speculators,” he says. “It can fly all over the place.”
He figures cotton futures are trading sideways now, but says speculators are scared. He figures the cotton market is dominated by big dealers but needs speculators.
“If you want to attract speculators, you can't have a market that can go up and down $5,000 in one day,” says Robinson. “That's a lot of money.”
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