2022/23 Fundamentals, Outlook, and Caveats

ICE cotton futures provide a forecast of the 22/23 cotton market.  Dec’22 futures are currently trading between $1.20 and $1.30, which is historically very strong.  The early fundamental indicators appear to justify support for these price levels.

The 22/23 carry-in could start things off with over three million bales to the U.S. new crop supply.  Then there is the new crop planted acreage question.  The Dec’22 CBOT corn/Dec’22 ICE cotton ratio had been shifting around between 5.7 and 5.9.  If it stays in this range, history suggests an outcome of between 12 and 13 million planted acres of U.S. all cotton (see below). This jibes with early growers surveys from Cotton Grower (12.5 million planted) and the NCC (12.0 million planted) as the assumptions by USDA at their Outlook Forum.  However, the late February/Early March rally in grain prices has bumped the corn:cotton ratio up to 6.3, suggesting a downshift in cotton acreage to an 11-to-12 million acre range.  So we should start there and then, because of the dryer-than-normal conditions plus the high insurance price, add 500,000+drought effect acres for a total of maybe 12 million planted.  This jibes with USDA’s Prospective Planting forecast of 12.2 million acres of all U.S. cotton.

Planting 12 million acres with above average abandonment (25%) and average yield (867 lbs) could give us the 16+ million bale U.S. crop and a 19+ million bale supply projected by USDA in the May WASDE.  Assuming with USDA that U.S. domestic spinning is 2.5 million bales and U.S. exports are 14.5 million bales, the result could be U.S. ending stocks at or under 3 million bales, which is tight in general and tighter than the previous year in particular (see last column below).  That kind of year-over-year adjustment and tight level is  is fundamentally price supporting, supporting prices well over $1.00 with upside potential towards $1.40.

Of course, it is early, and there is a lot of risk around this or any other projection.  As of May 29, 68% of U.S. cotton has been planted, which is slightly above average pace. About 43% of the U.S. cotton crop was rated good/excellent, with another 38% rated fair.  Texas is pulling down the U.S. average with 20% good/excellent and 51% fair.  Of course, history shows there isn’t a great correlation between weekly condition ratings and average yield (see Texas chart below).

When it is all said and done, we could have higher- or lower-than-average abandonment.  What if we plant 12 million acres and then continue having timely rains?  The production question will likely remain uncertain all summer, which will buoy prices. On the demand side, how much and how long will household discretionary spending be impacted by higher prices for gasoline and groceries, and higher car payments and mortgage payments?   At a minimum, such forces could be a headwind for apparel retail sales and ultimately the demand for cotton.  In which case, the assumption of 14.5 million bales of U.S. exports could be too optimistic, at least at prices above $1.20 per pound.


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