Cotton prices have been on a tear, bucking the trend of many commodities. Both old and new-crop contracts have moved to highs not seen since last spring. The rally is somewhat of a surprise, because global warehouses are reportedly stocked to the rafters. In the February crop report, the USDA maintained its estimate for 2012-13 global ending stocks at a burdensome 81.86 million bales, or 77 % of consumption. That is a record – modern day or otherwise – by far, for cotton, or any other commodity that we trade, for that matter.
There are two forces at work. Apparent demand seems to be robust. The US export pace for the 2012-13 marketing year has increased substantially. At the beginning of January, export commitments were running 13% behind the same time last year. At present, commitments of 10.089 million bales are only 3% behind the same time last year. We expect that exports will catch up and exceed last year’s tally. In 2011-12 a significant portion, about 25%, of total sales were bunched in October and November.
After that, exports were sporadic through the end of the season. This season, export sales have been steady, right through from the start of the marketing year in August. Moreover, shipments of 5.9 million bales are actually ahead of last year at this time by a substantial amount – over 1 million bales, or 21% – which lowers the risk of cancellations.
Another interesting distinction between this season and last is China. Bears cite the possibility that China will begin to sell off stocks into the domestic market as world prices increase, lowering the need for imports. But Chinese imports have not been the driving force this year that they were in the past. Total year-to-date sales to China in 2012-13, shipped and unshipped, are just over 4 million bales, down close to 30% from last year when total sales at this juncture were 5.7 million bales. Even if China pares back imports, commitments have surpassed 10 million bales, and with 5 months remaining in the marketing year, the 12.5-million-bale USDA target is well within reach. Weekly sales would have to average about 100,000 bales.
The other factor that is driving prices is more forward-looking. The major producing countries will be devoting less acreage to cotton planting for the 2013-14 crop. The most stark example is the US where it is estimated that some regions will see cotton area reduced by as much as 25%. Early forecasts put the US crop at about 13 million bales, down from 17 million bales in 2011-12. That would be just slightly larger than output in 2008-09 and 2009-10 – which averaged 12.5 million bales – and which sparked the spike to above $2 per pound. We will get a better picture of the national average when we see the planting intentions report on March 31. The estimates for 2013-14 global output vary wildly, from 111 million bales to 115 million bales.
In the interim, traders will grapple with the possibility that the rally may have been timely enough to have encouraged a shift of some more acreage to cotton. We believe that the rally was too late. Even at these prices the economics favor grain and soybean planting.
Chart 2, 3 and 4 show that, indeed, over the past few months, cotton has outperformed the three major crops that will compete with it for acreage – soybeans, corn, and wheat.
In historical terms, however, as seen in Charts 5, 6 and 7, the rally in cotton prices has hardly made a dent in relative profitability.
The market has attracted a fair bit of speculative activity. Funds carry a hefty net long position (Chart 8), but at the same time the pause in the rally during January and February did not heap on unsustainable new long positions. On the contrary, open interest dropped by about 20,000 contracts and the net-long position fell back as well. We therefore expect setbacks in price to be moderate.
Remain long. Raise the 72.5¢ per pound stop recommended on December 19 to 77.5¢ per pound, basis December, close only.