Why aren’t burdensome cotton stocks pushing prices down?

The March 28 Planting Intentions Report showed that U.S. farmers will plant 10.026 million acres for the 2013-14 cotton crop to be harvested this coming fall, down from last year’s final planting estimate of 12.701 million acres. The forecast was near the low end of analysts’ guesstimates. New-crop contract months rallied for a few days in response, but the 88¢-cent-per-pound level proved to be a near-term top. Prices proceeded to drop in the weeks that followed, by about 5¢ per pound, before finding some support at the 85¢-per-pound level.

We pointed out in our last discussion of cotton that even with the push toward the 90¢-per-pound level, it was still more profitable to plant soybeans or corn. No doubt the rally that began in November inspired some additional acres, but a new dynamic was introduced into the market that could be even more instrumental in expanding U.S. cotton area. It has been a very wet late winter and early spring, which has delayed corn planting. In regions where the optimum window for planting corn will close before farmers can get into the fields, cotton planting will be a viable alternative. Some analysts say that we could see as many as 1 million acres added to cotton area. The recent selloff in December cotton back down to 83¢ per pound reflected expectations for larger plantings.

As far as the other major producing nations are concerned: China and Australia will plant smaller crops as well, but Brazil, India and Pakistan will see an increase in cotton area. Total global production is expected to decline by about 3%, to 115.5 million bales. However, with a modest 2.6% increase in global consumption, to 109 million bales, burdensome inventories will continue to grow.

U.S. exports have been surprisingly strong and have provided some support to the market. Commitments were lagging behind last year’s pace as recently as early April, but have now pulled ahead of last year by close to 1 million bales, and are in perfect position to meet the USDA’s upwardly-revised target for 2012-13 sales of 13 million bales. But is it enough?

It’s quite possible that global cotton usage is in perpetual decline. During the mid-2000s, annual global consumption peaked at more than 120 million bales. The global recession certainly affected cotton demand, as it did for most every commodity, but cotton lost market share to synthetic fibers as well.

The estimates for burdensome global inventories continue to inch up every month. The April USDA crop report revised 2012-13 ending stocks up to 82.45 million bales, or 76.8%, up from the 76.3% March estimate. As illustrated above, that stockpile should continue to grow in 2013-14.

Sounds like a great short? There are several reasons why it is not. Cotton has regained some lost market share to synthetics over the past two marketing years. The growth spurt for synthetic fiber vis-à-vis cotton has likely plateaued. While this in itself does not account for an appreciable increase in cotton usage, and the recent jump in U.S. sales does not guarantee that demand will return to mid-2000 levels, it is commensurate with the world’s slow climb out of recession.

Cotton usage could return to mid-decade levels. The evidence at the moment suggests that this is possible. We pointed out in our last article on cotton that despite the impression we get from headlines, China is not the only cotton customer. In notes accompanying a recent cotton report, the USDA points out that Indonesia, Thailand and Vietnam are importing record volumes of cotton this marketing year.

Even if acreage benefits from corn switching, U.S. cotton acreage is at its lowest level since 2010, which could make the market vulnerable. The uncooperative planting weather has slowed down cotton seeding as well. As of the most recent planting progress report, only 17% of the crop had been planted, down from 35% last year at this time and still well below the five-year average of 27%. The same vulnerability applies to the other key producers.

In the meantime, cotton prices are hovering well above historical highs. We’re still nursing a long-held long position with a stop at 77.5¢ per pound, basis December. Raise stops to 82.5¢, close only.

About the Author
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at ssanik@friedberg.ca