Cotton disappointed by US crop

A disappointing US cotton crop does little to keep the bull alive

After collapsing from $1.4-per-pound highs this past summer, new-crop cotton prices have fluctuated in a relatively narrow band.

Prices are still very high in historical terms – the average price over the past 20 years has been about 55¢ per pound. About 70% of the absolutely abysmal US 2011-12 crop has been harvested. Drought devastated the crop, which was planted on 14.72 million acres – the largest area in modern history.

The harvested/planted ratio is estimated at 66.9%, compared with 97.5% in 2010-11 and 82.2% in 2009-10. That is the lowest recovery rate in US history. Production is estimated at 16.61 million bales, down from an 18.1-million-bale crop in 2010-11, which was planted on a relatively scant 10.97 million acres. Bulls have been clinging to what would normally have created a very tight world supply situation, with the US being the world’s largest exporter of cotton.

Most other major producing countries had much better luck with expanded acreage. Chinese production is expected to jump to 33.5 million bales, up from 30.5 million bales in 2010-11. Indian output is expected to increase to 27.5 million bales, from 25.4 million bales the previous season.

Pakistan, the fourth-largest cotton producer, was an exception among Asian growers. A record crop of 10 million bales was expected, but heavy flooding reduced output by about 800,000 bales from earlier estimates. A rough estimate puts production at 9.2 million bales, still above 2010-11 output of 8.8 million bales.

Even after accounting for the US disaster and adjusting for Pakistan, global production is estimated at a record 123.4 million bales. Problem is, it seems that nobody wants much of it. US exports have fallen dramatically behind last year.

The weekly USDA export report shows that commitments stand at 7.5 million bales, down from 11.4 million bales at this time last year. During September and October, US farmers sold an average of 150,000 bales per week. That compares with 486,000 bales per week in the same period last year. There was one large sale to China during the period, which brought the tally for that week up to 385,000 bales, but the following week saw a return to the anemic pace of sales, with commitments of only 92,000 bales.

There is a silver lining in this dismal demand outlook. Exports must average only about 110,000 bales for the balance of the marketing year to meet the USDA’s very pessimistic forecast for final sales of only 11.5 million bales, down from last year’s final sales of 14.38 million bales.

There are many economic and financial events popping up all around the globe that give credence to expectations of demand destruction for goods and services – cotton included. But it’s entirely possible that the USDA has underestimated demand. For example, since the summer, the USDA has been ratcheting down its estimate for a huge jump in Chinese imports over last season. The June estimate was as high 16 million bales. With the most recent downward revision, that estimate is now 14 million bales. A recent government report, however, says that the Chinese cotton imports will rise by 22% this year, which is about 600,000 bales above the USDA’s revised estimate. It is not very much cotton in the grand scheme of things, but it does mean that the negative demand news has been discounted, and better news from the export front could actually be bullish.

Global inventories have been replenished. After adjusting the October USDA data for a smaller Pakistani crop and higher Chinese usage, ending stocks will jump to 45.7% of usage, up from 39% and 37% in 2010-11 and 2009-10, respectively.

By all rights – at least in terms of apparent fundamentals – we should be back to 70¢ per pound. Yet the market has held support at the 96¢-per-pound level. The low was set way back in July at 93.20¢ per pound. Our September 9 long-position recommendation is under water and certainly should be stopped out at 95¢, close only.

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