When cotton sold off to 77¢ per pound in November, it touched very close to the cost of production. In the U.S., for example, yields vary widely from region to region, but at the national average of about 800 pounds per acre, the cost of production is about 75¢ per pound. Soybean farming – in particular – is more profitable, and it is quite reasonable to speculate that cotton acreage will shrink even further this coming spring.
Consider that this past season, planted cotton area was 10.34 million acres, compared with 12.31 million acres in 2012-13 and 14.74 million acres in 2011-12. Our associate, John Bondurant, who is a commodity fund manager and soybean and cotton farmer, tells us that there has been divestment of cotton intensive equipment, a clear indication that farmers are scaling back cotton farming. Farmers have been selling their cotton pickers. A new picker costs about $650,000. With overall costs rising – as pointed out above – and with the lure of planting more profitable crops, there is little chance that farmers will be taking the risk to repurchase expensive machinery.
For the other significant producing nations, China and India, the pattern of declining crop size is not quite as stark as in the U.S., but certainly there is no output growth. Chinese cotton area for 2013-14 was down 6.5%. Indian production has hovered around 29 million bales since the 2011-12 season.
The market’s current focus is on the prospect for a pickup in Chinese imports. The evidence continues to suggest that this is not happening. U.S. exports are forecast to fall by 23% this season. Total export commitments to date are only 19% behind last year at this time, but Chinese purchases, the ones that count, are 61% behind last year. The changes to the import-tariff regime should bolster sales to China to some degree, but there is a lot of catch-up to be achieved.
Regardless of the long-term implications of near-certain smaller crops down the road, it is hard to imagine seeing a sustainable bull run with the massive overhang of Chinese stocks that, according to the USDA, are equal to a staggering 159% – yes, 159% – of usage.
Remain short as per our Sept. 12 recommendation. Lower stops to 86¢-per pound, basis March, close only.