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 early in the year, when new crop corn futures prices were as low as they were 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.

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, as well as recent rainy conditions. 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.  The week ending June 23 saw the wrapping up of planting in most states with Missouri (89%), Oklahoma (91%) and Texas (95%) being the laggards. U.S. cotton crop condition this week showed 50% “Good-Excellent”, with another 33% rated “Fair”.  Texas cotton condition this week show 41% “Good-Excellent”, with another 34% rated “Fair”.  However, the chart below shows that the relative level of condition ratings across years is necessarily correlated with yield differences.

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.  However, the uncertainty about planted acres has created more than the usual amount of production uncertainty.

USDA’s U.S. new crop all cotton balance sheet projections from May and June (second column) and February (third column) are both less bearish than what I’ve assumed above, but are still instructive about risk.

Whichever way you slice it, new crop ending stocks are likely going higher, and hence prices will likely weaken.  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 if prices rally back over 70 cents (click here and scroll down for an example).

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.

From a demand perspective, it is reassuring that USDA is forecasting 17 million bales of U.S. new crop all cotton exports.  I hope this target isn’t put in jeopardy by the continuing U.S.-China trade dispute.  New crop sales and shipments is definitely something to keep an eye on.



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