This season’s U.S. cotton plantings are above average in size and have been planted on time. So far, 61% of the U.S. crops is rated as “Good” to “Excellent”. The large cotton acreage is a set up for some potentially wide swings in price. One important benchmark is soil moisture, which had been widespread adequate coming in to the planting period. There was a drying pattern in May, then widespread showers in early June which helped the overall situation in Texas. Then right on the heels of those rains we had extremely hot temperatures in West Texas in mid-June, which resulted in widespread drying out of soil moisture. This drying is reflected in the latest U.S. Drought Monitor picture for the U.S. Cotton Belt looks reasonably good, but has been fluctuating between the rainy and hot spells. The current three month outlook calls for above normal precipitation, but we will still have to see how that forecast plays out. As I mention in this earlier column, after the crop is planted, the influence of prices on plantings will switch to an influence of production expectations on prices. We will have to see what kind of summer it is.
The May and June WASDE new crop projections assumed USDA’s March 31 estimate of 12.2 million acres of all cotton. USDA further assumed ten year average abandonment, weighted by region and adjusted downward in the southwest to only 10% to account for favorable moisture. That results in 19.2 million bales of production which exceeds my earlier conservative estimate of only 18.0 million bales. A significant aspect of the May WASDE was that USDA did not maintain the level of U.S. exports at 2016 crop levels. The June WASDE is similarly significant in a further lowering of projected 2017/18 exports by 500,000 bales, to 13.5 million. USDA’s rationale in the June WASDE was because of expectations for greater foreign supplies. I think that is reasonable, and I further do not expect record levels of export demand for the 2017 crop unless it has the widespread exceptional quality that the 2016 crop had.
In historical terms, it seems very likely that 2017/18 cotton ending stocks-to-use will be at least ten percentage points higher than the level for the 2016/17 marketing year. History shows that an increase in ending stocks and stocks-to-use is typically associated with price weakness. It is certainly possible to still have brief bursts of higher futures prices from weather market situations, driven by speculative buying. Again, this is similar to what happened in the summer of 2016.
The 2017/18 balance sheet belies a lot of downside price risk for the 2017 crop. Growers should consider that the Dec’17 contract has a good chance to trade from the upper 70s to the lower 60s over the next six months. It is further possible, as emphasized on the April and May Ag Market Network panels, that ICE cotton futures could slip into the mid to lower 50’s by harvest time. That could certainly happen if we have 19+ million bale crop, or have below-average quality, or both. The weaker price scenario is also tied to the strong possibility of increasing foreign new crop supplies. This possibility strongly suggests that growers should consider forward contracting while they still can, or (second best) hedging downside risk with put option strategies.
The new crop world market will have to deal with increased production and continued slow growth. Fortunately, world consumption is still expected to slightly exceed world production, but this will slow efforts to reduced world ending stocks. It may also lead to price pressure next fall when both new crop supplies and stocks-to-use outside China are increasing. For example, the world’s top cotton producer, India, is will likely have increased cotton acreage and perhaps an above average monsoon season.