What is in this article?:
- Chinese cotton reserves helping support market price
- Neutral to slightly bullish
- Supply and demand shocks
“If we subtract the 20 million bales of Chinese cotton reserves out of the market, it gives us a stocks–to-use ratio below 50 percent," says Hank Reichle, vice president of export sales and market administration for Staple Cotton Cooperative Association. "That’s why cotton prices today are at 70-odd cents rather than 50 cents, like they would’ve been if all that cotton was sitting in the market looking for a home. We’d probably be getting out of cotton pretty quickly if we were looking at 50-cent cotton versus $13-plus soybeans."
Supply and demand shocks
Looking at cotton prices over the last 40 years, Reichle notes, the average price was 66.61 cents.
“But the price moves the industry has had to deal with the last couple of years have been off the charts. So, it’s not surprising that we’ve seen a shock in both supply and demand. Hopefully, those days are behind us and we’ll have a more normal market going forward, which should help consumption to move back up.”
For 2013, Reichle says, “The grains and oilseeds markets will need every acre they can get, first from the southern hemisphere, then from the northern hemisphere. If we look at the futures market, they’re trying to buy as many acres as they can from anywhere in the world. This means cotton acreage is going to drop around the world and in the U.S.”
Cotton will still be grown where there is little ability to switch crops, or for infrastructure reasons, or for rotation reasons, he says, but for 2013, “We kinda suspect Mid-South acreage will drop back to the 2009-2010 level.
“We don’t know how quickly the grain markets are going to ration acreage. We feel like cotton is going to go down to historic lows, but we also expect big acreage cuts in cotton around the world in 2013.
“At some point, probably in 2014, the cotton market will have to come back into the acreage battle and take back some of the acreage it has shed over the last couple of years.
“Last year, when growers around the world were making planting decisions for 2012, cotton was 90 cents to $1 a pound and grain prices were 30 percent to 40 percent lower than they are now — yet cotton acreage was still sharply reduced around the world.
“Next year, if we’re looking at 70-cent to 80-cent cotton, or maybe a little lower, and grain prices stay strong, there will be cutbacks in cotton everywhere in the world. And that’s what we need to be able to get supply-demand back into kilter, so cotton will join the acreage battle again and prices will rise to give you an incentive to plant.
Things to watch over the next 18-24 months, Reichle says:
• The Chinese reserve policy. “Will they continue to buy and hold or will they release some of that cotton? This will have a huge bearing on the market.”
• Potential world crop problems or high yields. “We know acreage cotton dropped this year, but we don’t know if we’re going to have weather disasters or bumper crops. Obviously, the more weather disasters we have, the more friendly it would be to the market, or vice-versa.”
• How the world responds in 2013 to the grains/oilseeds shortage. “Hopefully, growers will switch to what’s most profitable; if that’s the case, cotton will be able to join the game much sooner in terms of getting acres back because they’re needed.”
• A resurgence in cotton consumption. “We’re continuing to see lackluster demand. A lot of that is due to the damage that $2 cotton did, a weak economy, what’s going on in Europe, and other concerns. There is a lot of fiber chasing a small market. As demand returns, and we work out problems over the longer term, that should lead to better cotton consumption.”