2019/20 Fundamentals, Outlook, and Caveats

Supply influences tend to dominate before the marketing year officially begins.  The key question in the first half of 2019 is the level of new crop production.  Cotton prices remain relatively good compared to grains and oilseeds..  This might contribute to at least as much, if not more, cotton acreage planted in 2019.   History suggests that when new crop corn futures prices are this low in relation to corresponding cotton futures, we could expect cotton planted acres pushing 14 million acres.  Hence, I am not surprised by the National Cotton Council’s measurement of 14.45 million acres of intended cotton plantings, nor USDA’s February projection of 14.3 million planted acres.  Historically, actual plantings vary from that early NCC benchmark by an average of 7% to the upside and 6% to the downside.  That translates to a possible one million more or 800,000 fewer acres than what NCC measured.  USDA’s March 29 Prospective Plantings came in on the low side of expectations at 13.8 million acres of U.S. all cotton, but is well within the historical range of adjustment.  Until the June 30 report comes along, I’m hedging my bets with a forecast of 14.0 million planted acres.

The weather in 2019 is a major consideration, as it always is. NOAA is forecasting El Niño conditions through the summer and fall This is consistent with the wetter winter weather that we have already observed. This raises the possibilities of soil moisture accumulations,  lower abandonment, and higher yields for spring-planted crops in the drier regions of the Cotton Belt.

Planting progress is a major consideration.  As of the week ending April 21, the Far West region showed a 10-15% delay in planting while the early planting in the rest of the U.S. Cotton Belt roughly tracked the five year averages, by State.

Assuming 7% abandonment and 850 pound average U.S. yield, planting 14.0 million acres could produce a 23 million bale crops, which implies a very healthy supply of 27+ million bales.  Even with a strong assumption of 17 million bales of U.S. exports, the ending stocks outcome is about 7 million bales.  Increasing ending stocks year-over-year is historically associated with price weakness.  It has been a while since we’ve had futures below 65 cents, but I at least want to remind readers of the possibility of downside price risk.

What can be done about this situation? First, go into it with your eyes wide open, knowing the expected per unit costs of production that you must cover if you are going to plant cotton. Second, consider the risk of hanging on to unsold 2018 bales. Third, consider pricing or hedging some 2019 cotton earlier while prices are still above 70 cents (click here and scroll down for an example).  This last point can be refined:  if there is a rally in Dec’19 to the mid and upper 70s, consider forward contracting and/or hedging at more meaningful and affordable price levels.

In other words, act quickly to implement a strategy like this if there is a rally in the futures market. Another obvious prerequisite for a strategy like this is establishing the necessary brokerage relationships and accounts, not to mention pre-planning the orders. It will be too late to do this when the market is briefly 5 cents higher after an unexpected development.  And it will likewise be too late if the market is 10 cents lower by summer.



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