Cotton Market Update
Values for the most actively traded May contract have generally been bouncing between 62-and-a-half and 64 cents for most of the past couple weeks.
Prices for the new crop December contract have been marginally higher, and have been trading between 63 and 65 cents.
Both contracts increased about one cent with the release of the USDA Prospective Planting report.
Series of Acreage Forecasts All Point in the Same Direction
The arrival of spring is always accompanied by the release of a series of acreage forecasts.
The first of these is the Planting Intentions report from the National Cotton Council. The numbers in this report are based on a survey conducted in late December and early January.
The second estimate is released by the USDA at their annual Outlook Forum in late February. This estimate is based on analyst estimates.
The third release is the USDA’s Prospective Plantings report, which comes out on the last business day of March.
Like the council’s Planting Intentions, the Prospective Plantings Report is survey based.
However, the USDA’s survey is distributed during the first two weeks of March and with the USDA’s surveys collected at a date much closer to planting, the figures in the USDA report have proven to do a better job at predicting the eventual amount of cotton planted.
Prospective Plantings Report Suggests Lower Acreage
As had been predicted in each of the previous forecasts, this year’s Prospective Plantings report suggests that there will be an important decline in cotton acreage in the coming crop year.
The National Cotton Council predicted a 15% drop abck in early February. The USDA’s analyst-based forecast called for a 12% decrease later that month.
This week’s Prospective Planting Report nearly split the middle in calling for a 13% reduction, suggesting that 9.5 million acres will be planted, implying a 1.3 million acre decrease relative to the 11.0 million acres planted last spring.
In acreage terms, the largest reductions in planting are expected in Texas, where a decrease of half a million acres is projected.
Other sizeable decreases are expected in Mid-South states, most notably in Arkansas and Tennessee, where acreage is projected to drop by more than 100,000 acres.
Many states in the Southeast growing region are expected to decrease plantings by 15-20%. Collectively, the decline in the Southeast is expected to be slightly larger than the one in the Mid-South.
However, cotton in the Southeast is expected to hold to levels above those experienced during the 2008-09 time period, when national acreage dropped off considerably.
Acres in the Mid-South shifted below 2008-09 levels in 2013. Estimates suggest that the shift towards lower planted acres in that region was not transient and that a structural decline in the importance of cotton has occurred in the Mid-South.
Given the consensus among forecast for a reduction in cotton plantings across the cotton belt somewhere in the neighborhood of 10-15% in the coming season, a reduction in production can be expected.
Early Look at Production and Stocks
The application of average yields and abandonment rates to current acreage figures suggests a crop somewhere in the ballpark of 14 million bales.
While this is about two million bales fewer than the current harvest, off-take can be expected to remain depressed next season due to reforms to Chinese cotton policies and the corresponding reduction in Chinese import demand.
Assuming China remains a reluctant buyer, a key variable for U.S. stocks next season will be the weather in West Texas.
The area around Lubbock has received above rainfall over the past year. While this may help their crop get off to a better start, there is a long time until harvest and a long time for the weather to influence abandonment and yields.
Another tough year out there could lead to a slight reduction in stocks and may lend some help to prices. A good year could lead to an increase in stocks and additional downward pressure.