2019/20 Fundamentals, Outlook, and Caveats

For planning purposes, it is never too early to be thinking about opportunities and risks.

The key question in early 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 (the ratio is 5.3 circa February 8, 2019), we could expect cotton planted acres between 13 and 14 million acres (see the graph below).

The weather in 2019 is a major consideration, as it always is. NOAA is forecasting El Niño conditions through the summer. 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.

Assuming 7% abandonment and 850 pound average U.S. yield, planting 14 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 almost 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 relatively high (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 2 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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