Policy Uncertainty. The last ten years have been a case study in how foreign government policies have influenced the cotton market. Several major examples are India’s domestic minimum support price program, the 2018 U.S. farm bill, the U.S.-China Phase One Agreement, the U.S. Market Facilitation Program, and the U.S. CARES act funding. A more recent example is the Chinese tariffs on Australian cotton imports, and the U.S. sanctions on cotton products from Xinjiang.
The supply question for the ’21 is still an open question. Planted acreage is a mostly settled variable with 11.72 million acres of all U.S. cotton currently projected by USDA NASS. The next question concerns moisture and growing conditions. The U.S. crop is still late, but catching up, with rate of boll opening only 5% off the 5-year average pace, as of September 19. The U.S. crop condition rating for the week ending September 19 puts U.S. cotton at an historically high 64% good/excellent with another 28% fair. This better than in recent years years, especially in Texas (see blue dots on the chart below).
The conditions this season have been particularly variable, creating above average uncertainty in the outcome. The 2021 crop started off in extreme drought conditions. Then the early growing season was impacted by widespread and considerable rainfall in early summer. This greatly complicated the picture since there net benefits from the rain in some places and net costs from it in others. August saw normal heat unit accumulation. The crop is generally late, but progressing and maturing in the recent warm, dry conditions (according to the weekly field assessments). The relatively dry weather has helped with the South Texas harvest as well as the North Texas maturation.
USDA is assuming 11.72 million planted acres, historically low U.S. abandonment (11.6%), and below average yield (8oo pounds per acre) per the August balance sheet (see chart below, last column). USDA appears to be assuming that 1) while more Texas dryland will be harvested than previously thought, 2) it won’t yield enough to maintain a higher average U.S. cotton yield. Time will tell, beginning with USDA’s proven yield field sampling that presumably should expand across Texas in September. I think that there is room for price volatility in both directions as the current balance sheet gets updated. The current three million bale ending stocks outcome should support futures in the in the upper 80s or low 90s. Going forward, any surprises in the form of lower production from inadequate heat units, flooding, tropical storm damage, inadequate maturation or messy harvest season could push prices higher. On the other hand, a few million extra bales from a good growth, maturation, and harvest conditions could pressure prices in the fall.
The graph below shows how USDA’s U.S. cotton production estimate varies, higher or lower, from it’s initial August estimate. In years where the estimate gets smaller, the average downward adjustment over eleven months is 6%. Compared to USDA’s August estimate of an 17.8 million bale crop, the average downward adjustment would be over a million bales.
Demand Uncertainty. For U.S. cotton, the two main demand categories are domestic mill use and exports. Domestic U.S. consumption is estimated by USDA at 2.3 million bales. Exports are generally a more important source of demand as they represent over 85% of projected total use of 2020/21 U.S. cotton. The main indicators of export demand are weekly sales and shipments of U.S. cotton. For the week ending September 16, U.S. net export sales were very strong at 345,400 running bales for the current marketing year. The export sales pattern has generally tracked with opposing price trends, as expected, although it has continued at high price levels. The pace of actual export shipments of all cotton (i.e., upland and pima combined) is a little sub-par, but it is just beginning.