2020/21 Fundamentals, Outlook, and Caveats

Grower experiences with declining prices and challenging production during 2019 have already stimulated discussion about the implications for 2020.  It is never too early to begin planning for next year, so here goes.

The first major question will be new crop acreage.  There are currently publications of grower intention surveys, like this one.  The futures markets provides some guidance, but it’s been a moving target..  The chart below shows planted acreage outcomes for U.S. all cotton (upland and pima combined) plotted against the ratio of CBOT Dec. corn futures to ICE Dec. cotton futures, during the first quarter of the year.  (To make the math easy, imagine a hypothetical situation of $7.00/bu corn and $0.70/lb cotton, which generates an off-the-scale ratio of 10 — with little cotton acreage likely being planted.)  In general, when the futures price of corn is high relative to cotton, very often the prices of soybeans and wheat are also higher.  Historically, as the corn/cotton price ratio was higher, fewer cotton acres were planted.  In November and December, the ratio of CNZ20/CTZ20 futures was 6.4, suggesting between 9 and 11 million acres possibly planted to cotton.  However, the more recent rally in ICE futures has lowered the price ratio and raised the predicted acreage by a million acres.  We will have ot monitor what happens to this outcome in terms of relative prices during the first quarter of 2020.

A second question will be Spring soil moisture implications.  NOAA is currently forecasting ENSO-neutral conditions, implying average rainfall and temperature expectations.  This is mostly reflected in NOAA’s longer range outlook.  On the other hand, it is dry across Texas at present, so we need some winter-time rains just to bring us up to average moisture conditions.

So, let’s assume 12 million planted acres and average U.S. abandonment (15%) and yield (800 pounds per acre).  That could give us something approaching a 17 million bale crop.  Currently, USDA is forecasting 5.4 million bales of carry-in, giving 22+ million bales of supply.  I would assume lower U.S. exports than in 2019 due to higher prices, so maybe 15.5 million bales.  The bottom line of all that is about 4 million bales of U.S. 2020/21 ending stocks.  That is right on the verge of either treading water (little year-over-year change) or decreasing ending stocks year-over-year. These two ending stocks outcomes are historically associated with different seasonal price paths, as shown below.   The red line (seasonal December futures prices in “tightening stocks” years are more price supportive, especially later in the season.

What kind of plan can you make for such a possibility? 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 cost and risk of hanging on to unsold 2019 bales. Third, consider pricing or hedging some 2020 cotton if prices rally back toward 75 cents (click here and scroll down for an example).



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