Despite Wild Swings in Estimates, Cotton Market Remains Steady
Wednesday, September 14th, 2011
Despite wild swings in USDA's Sept. 12 estimate of U.S. cotton yield, when all was said and done, overall U.S. cotton production and the cotton market remain steady to higher.
"Just in the yield calculations alone, there were yield changes in 16 of 17 states," said Mike Stevens, cotton analyst and commodity trading advisor, speaking at the Ag Market Network's September conference call. "Six were up and 10 were down. But it didn't change the bottom line."
Stevens said recent trading sessions in the cotton market "have ignored the traditional influences like the value of the U.S. dollar, the lack of export demand and even technical signals. December is clearly overbought, but it really doesn't seem to matter. We have now moved the trading range up to $1.09 to $1.15. The next target will be $1.17 to $1.22. I would not bet against that.
"Traders continue to trade the long side due to the competitive strength in the December-March spread. The market's failure to move back toward carrying charges has got everybody really antsy because of the lack of deliverable supplies."
Stevens added that mills "have woken up to the fact that they can paint themselves into a corner with unfixed positions just like last year. Until something proves different, it looks like this market is going to stay firm."
John Robinson, Extension economist, Texas A&M University, said the changes in yield across states was surprising. "I was expecting a reduction in the Texas number, but they only whittled it down from 636 pounds to 631 pounds. I would have expected it to come down more than that. Maybe that's still true, but it will take another month or two for that to happen."
There were significant changes in some cotton states. For example, Louisiana cotton yield increased from 800 pounds per acre in August to 926 pounds in September, a 25 percent increase. Yield declined by 154 pounds in Virginia, however.
O.A. Cleveland, professor emeritus, Mississippi State University, believes the Louisiana cotton crop had probably been underestimated in previous months. This, plus improvements in the crop since then, resulted in the significant increase in estimated yield.
Cleveland also noted that Arkansas, Missouri and west Tennessee "have the most outstanding crop there is, period. Missouri's yield of 1,092 pounds is just unheard of for the state. West Tennessee producers are very pleased with their crop."
Losses in the Alabama crop were due to the cumulative effects of heat and drought working on the crop, according to Cleveland.
"In Georgia, I think the fruit was probably there, but the crop was so late, it may not have time to develop, so they had to take the crop down."
Robinson added that the effects of Hurricane Irene on Southeast cotton explain significant declines in estimated yield for Virginia, North Carolina and South Carolina.
Changes in the world supply and demand estimates were also noteworthy, according to Carl Anderson, Extension professor emeritus, Texas A&M University. "The Chinese crop was increased by 1 million bales, from 33 million bales to 34 million bales, compared to 30.5 million a year ago. So apparently that crop is doing fairly well."
Despite this, there is still a very tight gap between foreign consumption and production of about 5 million bales, noted Anderson. "When you add it all up, you have global stocks up about 18 percent from a year ago, and a stocks-to-use percentage of 45 percent which would normally support the market."
Anderson noted that U.S. carryover increased to 3.4 million bales, which is up 31 percent from last year, and is the largest carryover since 6.3 million bales two years ago.
"This indicates that the market should be trading fairly stable for the next several months, barring any sudden weather shocks in any of the major-producing countries, the United States, China, Pakistan and India," Anderson said.
Softening cotton demand is also a concern, according to Anderson. "We're not getting much activity on the exchange from the user side. We had a big drop in cotton consumption last year which is what you would expect with higher prices. History says anytime we have an exceptionally big increase in price, you have a big hit in demand and big increase in polyester use. Demand is going to play a big role in whether the market is going to move out of the trading channel it's now in."
Anderson said that Texas cotton fields are in desperate need of moisture this winter to replenish subsoil moisture levels. "If the reports hold true of another three months to four months of extremely dry weather, it will be very difficult for our crop in Texas. Everything will depend on the spring rains."
"We're waiting with baited breath to see if there is an official forecast of another La Nina, which brought the drought to Texas last year," Robinson said. "If it happens, it's a repeat of the 1950s, back-to-back droughts."
Analysts collectively project a price range for December 2010 cotton of between 95 cents and $1.25.
"Right now, with conditions the way they are, if cotton gets under $1.05, you're going to have to get in line and get a ticket." Stevens said.
Cleveland doesn't see December 2010 cotton prices moving below a dollar a pound. "I tend to think this crop size may come down a bit. I sense that we're starting to see a minor pickup in demand."
Southeast Farm Press