In past US droughts, cotton crops were damaged by the hot and dry weather alongside grain crops. While the entire US has been affected by well-above-normal temperatures this summer, cotton crops have largely been spared the worst of the devastating drought that has slashed estimates for what was expected to be a blockbuster corn crop and a very decent-size soybean crop.
The most recent weekly progress report shows that 41% of the crop is in the good-to-excellent category, down from 44% a week earlier, but still up significantly from last year at this time when only 30% of the crop had the top rating.
To illustrate how much worse the effects of the drought have been on corn crops, consider that in mid-June, just before ratings began to reflect the hot and dry weather, 53% of the cotton crop was in the good-to-excellent category, which as mentioned above, is currently at 41%. Corn, on the other hand, has fallen from 60% to a meager 23%. Traders have therefore not focused much on cotton – certainly not from a weather angle.
Chinese output may prove to be somewhat of a bearish influence as well. Although 2012-13 planted cotton area was close to 10% below the previous year’s, favorable weather and better disease control seem to have improved yields in some areas. The current USDA estimate for Chinese output – based loosely on the drop in planted area – calls for a 30.5-million-bale crop, 3 million tonnes smaller than in 2011-12. Chinese analysts have been raising their estimates for the crop. The USDA will almost certainly raise its estimate for the Chinese crop in the August 10 crop report, but it will be very interesting to see if it will be by a substantial amount.
The Indian monsoon was late for cotton growing regions this year, and as a result, actual planted area will likely be smaller than earlier estimates. Once the monsoon did arrive, the rains were below average. The USDA has already been trimming its estimate for Indian output. The July crop report revised the 2012-13 crop down from the June estimate, by 1 million bales, to 24 million bales, substantially below output of the previous two seasons of 26.5 million bales. We’re guessing that there will be further downward revisions to the Indian crop, because all recent revisions for the monsoon have been down. The extent of the weak monsoon was not yet known at the time the last crop estimate was prepared.
The 2011-12 marketing year ended on August 1.The late-June cancellation by China of 600,000 bales of old-crop cotton put a damper on the export picture. The final tally for commitments was over 12 million bales, leaving about 1 million bales of unshipped old crop to be carried forward to the new marketing year.
The USDA has been persistent in revising down its estimate for Chinese domestic usage to a multi-year low. In now stands at 39.5 million bales. This is the single most important demand-side issue for the international price of cotton, because it determines the size of Chinese imports. The pessimism is consistent with the gloomy forecasts for anemic economic growth rates around the globe and particularly in China.
The most bullish aspect of this market relates indirectly to US grain crops. US farmers will be taking advantage of the rally in next season’s crops by selling forward to lock in historically high prices. December 2013 corn and November 2013 soybeans are trading well below spot prices, but also well above the historical norm for new crop prices that won’t be planted for eight or nine months. While December 2013 cotton is trading at a small premium to spot prices, corn and soybean prices for the 2013-14 crop year have risen far more dramatically (Chart 2) and will be far more profitable to plant at these prices. The next crop year should therefore see many cotton acres shifted to corn and soybeans where viable. To balance the acreage distribution, cotton prices must rise.
Raise stops on long December cotton positions to 69¢ per pound basis December, close only.