USDA's August estimate of a 2006 U.S. cotton crop of 20.4 million bales took most by surprise — the thinking was that dry weather and the overall poor condition of the crop would result in an estimate about a million bales smaller.
The high expectations resulted in a decline in New York futures prices, which took away some of the gains of recent weeks.
“We gave back just about half what we took a month to get, but when you look closely at the crop report, you'll see it was justified,” said Mike Stevens, with Swiss Financial Services, a speaker at the Ag Market Network's monthly teleconference and radio broadcast.
“There are still some question marks about the Mississippi crop, but Arkansas, Tennessee and Missouri are having some of the best crops they've ever had. So it's not all bleak.”
“What we need to think about now is whether this 20.4 million bale U.S. crop holds,” said Carl Anderson, Extension specialist emeritus, Texas A&M University. “There is an old saying that small crops tend to get smaller with each month's forecast. I wouldn't be surprised to see this crop eventually end up around 19.5 million bales, or maybe as much as 20 million bales.”
Anderson says new cotton varieties “are performing great, even here in Texas where we have extremely stressed dryland cotton. Where the dryland had a fair chance, we're seeing a fair crop. But we must remember, we have zeroed out 2.2 million out of 6.4 million planted acres. So it's gone.”
Globally, demand for cotton is still strong, according to Anderson. “World consumption, according to USDA, is projected to increase faster than production, leaving a 6-million bale shortfall. As a result, world stocks will decrease for the second year in a row. This is supportive of the market, and we think eventually it will go up a little bit.
“On the downside, the stocks-to-use ratio has declined from 86 percent last year to 84 percent this year. It needs to go to about 60 percent before we get a strong upward roll in the market.”
Strong trade competition will come from India, which is expected to produce a 21-million bale crop this year, and use about 17 million to 18 million bales domestically. Crop conditions outside the United States, “are looking good,” Anderson said. Foreign production is expected to fall short of consumption by 21 million bales. So 21 million bales need to come from either the United States or somebody else. “We see the opportunity for the export market to remain strong.”
USDA also substantially increased its estimate of U.S. exports for 2005-06, due to a flurry of sales prior to the termination of Step 2, while decreasing the export forecast for 2006-07.
On the other hand, “today, we're looking at a lot of cotton that is offshore on a consignment basis and it will fill the immediate needs of our export customers, especially China,” Anderson said.
With the loss of Step 2, “the natural price of cotton is going to have to move closer to the world price, low enough to pay for transportation costs to its final destination. Those transportation costs have gone up substantially in the last year or two.”
We're having to relearn fundamentals,” Stevens said of marketing cotton without the popular program. “Merchants are going to be a little tougher to deal with, because Step 2 was the padding they used as a negotiating stick.”
Merchants are also concerned that the earliness of the U.S. cotton crop may translate into high micronaire related to heat stress.
Anderson still expects a 4-cent to 5-cent rally in cotton prices. “If so, it will get into your counter-cyclical payment for the coming year. The price so far for the first 11 months of the old year is 47.8 cents, so that's going to get you a maximum counter-cyclical payment for the 2005 crop.
“But 2006 is still a question mark. We still think the futures market, December, has a chance to run to the 58-62 cent range. It's looking a little more difficult to see anything better than 65 cents on December 2006.”
John Robinson, Extension economist, cotton marketing, Texas A&M University, also expects a small rally in cotton. “I do believe that we will have a rise of a nickel-plus in December futures. I would emphasize that growers who don't have cotton in the field or are not expected to harvest much and don't have a natural hedge, should consider doing something to protect the counter-cyclical payment.”
A rally, which Robinson expects to happen some time in September, will come on the heels of USDA's Sept. 12 supply/demand report. “We've been saying since July to wait until August and we'll see the numbers. USDA has been somewhat incremental in its approach, but I expect we will see a 6-8 percent reduction in stocks-to-use for 2006-07 compared to the previous year and that is justification for having a rally.”
News that could factor into the market in the coming weeks include the effect of a typhoon on China's cotton crop, and the fact that India's monsoon rains may have hurt that nation's crop, resulting in losses, according to Stevens. “But India has a huge crop and it is licking its chops ready to take some of our market and moving it into China.”