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.  Starting in January, there will be publications of grower intention surveys.  Until then, the futures markets provide some guidance.  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.  As of August 15, the ratio of CNZ20/CTZ20 futures was 6.2.  If that ratio persisted into Q1 of 2020, the scatterplot below suggests anywhere between 9 and 11 million acres possibly planted to cotton.  (A simple regression of the data predicts 11.3 million acres, but there are some likely down-shifters associated with negative farmer attitudes and financial constraints.)

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.

So, let’s assume 10 million planted acres and 8-year average U.S. abandonment (16%) and yield (851 pounds per acre).  That could give us something approaching a 15 million bale crop.  Currently, USDA is forecasting 7.2 million bales of carry-in, giving 22 million bales of supply.  I would assume similar U.S. exports as seen during 2018/19 (i.e., lingering tariff disruption effects) and pencil in 15 million bales.  The bottom line of all that is about 4 million bales of U.S. 2019/20 ending stocks.  Decreasing ending stocks year-over-year is historically price supportive.  It might support a similar futures price range as seen during the 2017/18 and 2018/19 marketing years, between 65 and 80 cents.

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 over 70 cents (click here and scroll down for an example).

 

 

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