US cotton crop diverts the bear

The global farmer had the best of intentions in trying to squelch runaway cotton prices. Acreage estimates expanded while prices zoomed out of control to more than $2 per pound. In the US, planted cotton area for the 2011-12 crop to be harvested this autumn jumped to 13.73 million acres, up from 10.97 million acres in 2010-11. That’s the largest area since 2006. Most other major cotton producer/consumer nations, including China, India, and Pakistan increased acreage as well.

In the US it was all for naught, as it turns out. Weather has been poor. The USDA August crop report estimates that the harvested-to planted ratio will be a paltry 70.4%. That is by far the lowest ratio in modern history. In good years that ratio reaches well over 95%. The lowest ratio in the past 25 years has been 80%, and it’s only been that low several times. That puts the crop at only 16.6 million bales, down from 18 million bales in 2010- 11. Very disappointing when you consider the 25% increase in planted area.

Some analysts have questioned the feasibility of the USDA’s optimistic upward revision for yield in the August crop report to 822 pounds per acre, up from 800 pounds in July. That would be the best yield since 2007. Given the inclement planting and growing conditions, it seems unlikely that we could top the 2010-11 yield of 812 pounds per acre. Texas, the largest producing state, suffered its worst drought in a century. Some analysts put the yield as low as 700 pounds per acre. The most recent weekly crop progress estimates the good-to-excellent portion of the crop at 28%, down two percentage points from the previous week, and compared with 60% last year at this time!

The USDA’s August global output to estimate for 2011-12 was122.71 million bales, up from 114.59 million bales in 2010-11, a 7% jump. Consumption is forecast to grow by a modest 1%. Ending stocks will jump to 52.66 million bales, or 45.7% of usage. That’s very close to bear market territory. In 2009-10 and 2010-11, ending stocks fell to 37.4% and 39.5%, respectively. In the five years prior to that period, global ending stocks averaged 52.5% of usage.

We expect further downward revisions to the US crop. There has been some damage to the Pakistani crop from severe flooding. Other than that, the crops of the large producers should come in at expected levels.

That’s the supply side. It’s been months since the US has sold much old-crop cotton. Starting way back in March, weekly net sales for old-crop cotton were negative in almost every reporting period. However, demand outlook was not nearly as bearish as headlines made it out to be, because business shifted to the new crop. New crop sales during this period were consistent with last year’s level. As of September 1, 2011-12 commitments stood at 6.74 million bales, compared with 6.94 million bales last year at this time.

Prices have fallen dramatically from their peaks. Even new-crop December, which never made it past $1.40 per pound (compared with old-crop spot prices, which traded well more than $2.00 per pound) fell by some 35% to reflect deteriorating bullish fundamentals. These included the larger crops and soft demand. If export demand continues to chug along at a boring pace, then the increased availability from Asian countries may do the trick and bring prices back into historical ranges.

The US is the world’s largest exporter, however, and supplier of last resort. Clearly, the market did not count on such devastating results from the 2011-12 crop. If we fall back into recession and demand levels are commensurate with economic activity, then the market caught a break and will be sufficiently supplied even with a small US crop.

Global ending stocks are just a chip shot from either bear- or bull- market territory. The crop failure in the US has ensured that the bear market has at the very least been delayed. If demand stabilizes and begins to grow again, we would expect prices to return to their highs.

Buy March cotton.

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