Tuesday, September 13, 2011

U.S. Cotton Market

After bouncing off support near 93 cents/lb and rising to levels above 108 cents/lb, December futures prices were pulled lower alongside a wide range of equity and commodity prices as the outlook for economic growth in many developed countries turned more pessimistic.  A Index prices also moved lower, declining from over 116 cents/lb to less than 109 cents/lb.  In the most recent trading, prices have rebounded somewhat, but remain lower than they were a couple weeks ago.  Weak demand continues to be a feature of cotton markets, and the uncertainty posed by a darker macroeconomic outlook poses questions regarding the potential for demand growth in 2011/12.  

Due to the slowdown in demand throughout the cotton supply chain that began last spring, the USDA lowered world consumption estimates for the second straight month.  At 115.2 million bales, the current estimate for world consumption in 2011/12 is 1.6 million bales below its July level.  The consumption figure for 2010/11 also declined, falling 1.0 million bales from 114.9 to 113.9 million.  The most significant reductions to 2010/11 consumption estimates were for India (-500,000 bales), Bangladesh (-300,000), Mexico (-200,000), and Turkey (-100,000). Consumption forecasts for 2011/12 were lowered for many of the world’s largest spinning countries; both Chinese and Indian consumption figures fell 500,000 bales, Pakistan’s figure dropped 200,000 bales, Turkey’s declined 100,000 bales, Bangladesh’s dropped 250,000 bales, and Mexico’s was lowered 100,000 bales.
World production figures were also lowered in the latest report. Production estimates for 2010/11 declined 559,000 bales and forecasts for 2011/12 declined 704,000 bales.  At the country-level for 2010/11, significant production revisions included those for Brazil (-800,000 bales) and Uzbekistan (-100,000).  These declines were partially offset by an Indian crop that was boosted by late arrivals and is expected to be 900,000 bales larger than previously estimated.  For 2011/12, the largest decreases in production expectations were also for Brazil (-600,000 bales) and Uzbekistan (-200,000).   West African production estimates were also reduced, with expectations regarding Burkina Faso’s harvest declining 200,000 bales and Benin’s harvest forecast declining 125,000 bales.  Mali’s projected harvest increased 125,000 bales.  These reductions were partially offset by a 554,000 bale increase to the size of the projected U.S. crop.  Growing conditions in Texas remain bleak, but recent rainfall in the Southeast and Mid-South has been beneficial.  With the crop expected to be larger, the forecast for U.S. exports also increased, rising 300,000 bales from 12.0 to 12.3 million bales.  Lower crop expectations for Brazil resulted in a 700,000 bale reduction to the 2011/12 Brazilian export forecast.

With the reductions in world consumption exceeding those for production, estimates for world ending stocks increased.  Estimated world ending stocks in 2010/11 increased 588,000 bales; estimated ending stocks for 2011/12 increased 1.7 million bales.  These increases in estimated stocks, along with lower consumption estimates, loosened stocks-to-use ratios.  At 39.5%, the stocks-to-use ratio for 2010/11 is marginally higher than it was in 2009/10 (37.4%).  The current estimate for 2011/12 stands at 45.7%, 6.2 percentage points higher than 2010/11.  Excluding 2009/10 and 2010/11, 45.7% represents the lowest value for stocks-to-use for any crop year since 1994/95.
Given that supplies are expected to remain tight relative to demand in 2011/12, there may be some reason to expect prices to eventually find support despite recent weakness.  Supplies in the U.S., the world’s largest exporter continue to be tight.  U.S. beginning stocks for 2011/12 are the lowest they have been in 15 years; drought conditions menace the largest cotton producing region in the country, and export commitments at this early stage in the crop year are the highest on record.   The Chinese government should be another source of support.  Although details have not surfaced regarding the volume of potential purchases, China did announce it will make purchases to replenish reserves at prices near or slightly above current levels.  In addition, elevated prices for crops that compete for cotton acreage should also keep pressure on prices.  Dry and hot weather has also had a severe adverse impact on U.S. corn and soybean crops. With the U.S. being the world’s largest producer and exporter of both of these crops, lower yields and production, coupled with forecasts for record world consumption for corn and soybeans in 2011/12, should keep prices for these crops high throughout the crop year.  To maintain acreage across the globe, cotton will have to compete with these prices, as well as strong prices for a range of other crops, or face future supply shocks.


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