2020/21 Fundamentals, Outlook, and Caveats

The new crop supply and demand situation is more complicated than usual.  The likely destruction of demand from combined restriction of consumer activity and economic contraction will probably carry into the 20/21 marketing year.  USDA is assuming an improvement to world and U.S. cotton consumption, but not a return to normal.  Perhaps they are optimistic, but there is a lot of time for things to unfold.

The new crop supply question is more immediate.  The first major question about new crop supplies is the planted acreage.  Relative prices suggest around 12 million acres of U.S. all cotton, based on history (see below), and that is what USDA measured in their June 30 Acreage report (12.2 million acres of all cotton).

With a benchmark for acreage, the next question concerns moisture and growing conditions.  NOAA is currently forecasting a 65% change of ENSO-neutral conditions during the summer, implying average rainfall and temperature expectations.  On the other hand, it remains dry in the Texas High Plains after parts of that region received some much needed rains.  So again, we’ll have to see how the season progresses from the initial, average looking cotton weekly crop rating.  The latter started off kind of in the middle, historically speaking, but has been steadily sliding until the the week ending June 28.

So, assuming USDA’s 12.2 million planted acres and average U.S. abandonment (15%) and yield (825 pounds per acre), the result is a 17+ million bale crop.  True, there may be more abandonment, but the tradeoff is that as more dryland is plowed up, the Texas and U.S. average yield per harvested acre will increase.  A lot of abandonment was already baked into USDA’s assumptions for the June WASDE.  So I will go with 17 million harvested bales for the time being.

A major influence for the 20/21 balance sheet is the huge projected carry-in (currently projected in excess of 7 million bales).  Even with a smaller crop, the bottom line is still over six million bales of U.S. 2020/21 ending stocks.  While that’s certainly not as bad as 8.0 million bales, it isn’t good.  Fundamentally, it is a recipe for ICE futures to trade between 55 and 65 cents per pound.



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