Cotton Market Situation and Outlook
Presented to the Market Club Network, J.C. Bradford and Company, Memphis, TN.
Don Shurley, Professor and Economist- Cotton
University of Georgia
September 14, 2000
I guess I will begin my remarks with Tuesday's USDA numbers. Regardless of what others have said, I believe the market was expecting an 18 million bale crop and perhaps less. There is simply no other explanation for the run December made to the 67-cent area in the weeks prior to the report. The 18.3 number was on the high side of what the market was expecting to hear and the market the past 2 days has responded with a correction to lower prices.
I do feel like the crop will get smaller with the October numbers. But unless something unforseen like a hurricane or wet conditions which result in harvest losses and quality problems should develop, I believe October will likely be the end of the supply side effects on this market and focus will quickly shift to the demand side. And this is where we have yet to prove ourselves.
Let's quickly look at both sides of the equation. The September report dropped the Texas crop by roughly ½ million bales - not nearly as much as thought possible. Mississippi prospects were lowered by 230,000 bales and Louisiana by 70,000 bales. There were other smaller changes up and down but not of major concern. The Georgia and Alabama crops were left unchanged. I believe the Georgia crop will drop another 100,000 bales- the 620 yield is probably a little high and there will likely be some additional abandonment not yet reflected in USDA's numbers. Also, a good portion of the early crop that we're now getting in and will be getting in over the next month is not going to pick very well. The bolls that are there are small and hard-locked and the picker is going to leave half of it in the field.
Crop conditions across the Belt continue to deteriorate. Conditions have declined now for 6 consecutive weeks. Currently, 64% of the crop is rated in "fair" condition or worse compared to 59% last week. Texas continues to be the big unknown. Likely the US crop will still decline to 18 million bales or less by the time all is said and done.
On the demand side, the September report dropped expected 2000 crop exports from 8.2 to 7.9 million bales. I don't believe this was totally unexpected and was no big surprise. It does raise a caution flag, however. US prices have shown a tendency to increase at a faster pace than the "world price" or A-Index. The drop in prices this week moves prices back to within 3 cents of the A and may help exports. In the final analysis exports will drive this market and determine whether we have over 4 million bales ending stocks or maybe closer to 3.5. Prices will move accordingly.
Since July 1, US export sales of the new crop have averaged about 100,000 bales per week. In recent weeks, sales dropped to about 21,000 bales the week ended August 10th and 45,000 bales the following week ended August 17th. The most recent figure, however, shows a nice rebound to 148,000 bales. With some of the uncertainty about the size of the US crop now behind us and with prices somewhat lower, perhaps shippers will be encouraged to be more aggressive in forward selling to foreign markets. Export sales must average about 150,000 bales per week to meet USDA's current projection.
Can the US export 8 million bales? This would be the highest level since 1994 . The reasons we did it then was because we exported about 3 million bales to China and other major exporting countries did not have the supplies. That is not the case now but I think what we have going for us is simply a tremendous increase in worldwide cotton demand since that time and a rebound from the SE Asia crisis that plagued the '98 crop. In other words, the pie has just gotten bigger. If we do export around 8 million bales, the US market share would be just 37% compared to 44% last year- so it would certainly seem do-able.
New crop Step 2 certificates peaked at 6.68 cents per pound on August 31st but it looks at though values will decline for the second straight week since then. Values have dropped because the US price has declined while the A-Index has increased. This is likely cause for concern among US cotton exporters.
Historically, a US stocks-to-use ratio of 23% (that's USDA's current estimate) and exports of 8 million bales give us a US average cotton price of 60 to 70 cents per pound. So the current level of futures prices minus whatever your basis might be does not appear to me to be out of line. I wouldn't be surprised to see a trading range of probably 62-63 cents on the low side and 66-67 on the high side until the crop size is firmed up just a bit more and then we'll likely break out of it one way or the other depending on the demand side.
We haven't mentioned US mill use at all yet. I personally have come to believe that this is pretty much a non-factor. It would be nice if mill use were ½ million bales or more above where it is but US mill use simply is not growing and the market has come to accept that now. USDA's current estimate is 10.2 million bales- the same as the August estimate and essentially the same amount as last year and within 200,000 bales of the '98 level. We haven't seen 11 million bales in quite a while and it looks like we're not going to anytime soon.
In recent months, US mill use ran at an annual rate of 10.15 million bales in April and 10.05 million bales in May. June was at a good clip of 10.57 million bales. July use fell to a 9.94 million bale annual rate and concerns began to circulate. If you average June and July together you get an annual rate of 10.25 million bales or right at USDA's projection so I see no reason for the market to be concerned yet.
One of the fear's that I have shared with Georgia growers for a few months now is the likely event that the US crop might not be as small as we think and that US prices end up taking a hit while the A-Index remains constant or continues to increase. What we'd end up with is lower prices and less POP. Sure enough it looks as though that's where we might be headed. The POP has declined from almost 6 cents in early July to roughly 3 ½ cents now.
One of the difficult decisions we're faced with here is that growers are tempted to leave the crop in the field as long as possible if there's a chance that rain will produce more harvestable bolls. Of course, the problem with that is that while waiting on more pounds, the price (POP) is going down so you'll get less for it. We are also reminding growers that the POP can be applied for once the cotton is in the trailer or module. If the POP or LDP is headed downward, this can save time a money.
I think one must guard against the event of a flat market after harvest. I'm not saying this will happen but I am saying that we've built up a lot of steam in this market based on the expected combination of a short crop and a good amount of exports. If those things don't come to pass, prices could be rather stagnant and if I'm a grower I don't want to get caught in that scenario. I think holding Call Options would be a good way to limit my exposure to something like that. I think there is a reasonable chance that if the crop get smaller and exports do well that we'll make another run at 67 or higher... but I'm not going to hold cotton in the warehouse and hope that it does.
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