Has the cotton bull had it?

US cotton exports have fallen back into a trickle pattern.

In the space of three weeks back in November, weekly export commitments averaged 807,000 bales. That would normally be several months’ worth of cotton purchases. It cast a whole new light on the fledgling market – or so it seemed. The market was slow to react, with prices trading though mid-December down to a one-year low of 85¢-per-pound. Eventually, prices rallied to just shy of the $1-per-pound mark, only to slip back into the confines of the major downtrend line.

Since November’s powerful spurt, weekly sales have averaged only 53,000 bales, but it doesn’t matter very much. We’ve just about reached the USDA target for 2011-12 sales of 11 million bales. Rather, at this point in the season we scrutinize shipments. Last year at this point in the marketing year US exporters had shipped 44% of the final sales target. This year, only 38% of the final sales target has been shipped. The marketing year runs until July 31, and exports would have to ship just more than 250,000 bales per week to meet the USDA sales forecast. Shipments were sluggish, but have picked up over the past few weeks. Shipments averaged 288,000 bales over the past four weeks, compared with 183,000 bales in the previous four weeks.

It’s safe to say that under current conditions – with commitments at the USDA target this early in the season and a fairly decent shipment pace – that the USDA has underestimated exports and we will probably see the estimate rising to between 12 million to 12.5 million bales.

Nevertheless, the outlook for prices is not terribly bullish. The February crop report raised global ending stocks to 61 million bales, or 55% of usage. That compares with the January estimate of 53% and last year’s carryover of 38% of usage. Moreover, prices are still high enough to ensure that robust planting intentions are met. With new crop December at 91.50¢ per pound, farmers can lock in prices that are still at historically high levels.

The 2011-12 crop harvested last fall was planted on 14.73 million acres. With severe drought not seen in many decades farmers harvested only 66% of planted acreage. Production reached only15.7 million bales, down from 2010-11 output of 18 million bales – which was planted on close to four million fewer acres.

The planted-to-harvested ratio for the US 2011-12 crop was an anomaly, and although moisture levels in the early going are not ideal, analysts do not expect the fiasco to be repeated in 2012-13.

Early estimates for 2012-13 US acreage have been inching up and are hovering around 13.5 million bales. Average yields over the past five years – including 2011-12 – were 815 pounds per acre. With average abandonment levels and a return to normal yields, we should see a crop of close to 21 million bales. If exports do pick up this year, as discussed above, and we add a hypothetical one million tonnes to 2011-12 sales, it does not really do much for the overall picture. Even with demand moving back to pre-recessionary levels for the upcoming marketing year, with a crop of that size we’d be looking at 2012-13 US ending stocks climbing to about six million bales, or 30% of usage, up from below 20% in 2011-12.

In conclusion, there are many variables including US exports, US acreage, planting and growing weather, to name a few. If everything runs on course, US ending stocks of 30% of consumption will encroach on pre-bull market levels. Sell December cotton. Place initial protective buy stops at 95¢ per pound, close only.

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