While certainties are few and far between as far as the world cotton market is concerned, there’s one thing you can bank on for 2013 — fewer acres will be planted.
“Certainly there will be more acreage reduction in 2013,” says John Robinson, Texas A&M University Extension cotton economist.
“I fully expect a big switch in the Southeast and the Delta regions out of cotton and into other crops, based on prices. In Texas, we’ll also see it, based on prices and the fact that we might have decent wheat stands that’ll carry all the way through to harvest.”
There is already anecdotal evidence of aggressive forward contracting of grains and oilseeds in the Mid-South, said Robinson at the 2012 Southern Region Agricultural Outlook Conference held in Atlanta.
“Feed grain forward cash prices seem very attractive, and the wheat insurance price is also strong and likely influential.
“If it’s a wet winter and soil moisture looks good, it might encourage stronger stands of Texas wheat, or it might tempt growers to forward-contract grain, or tempt growers to plant more corn in some places.
“I could see 2013 being one of those rare years with a year-on-year decline of greater than 20 percent in Texas cotton acreage.
“For a reference year, we might compare 2013 to 2007, when the 4.9 million planted acres of Texas cotton was 23 percent less than in 2006, and pretty much for the same reasons,” he says.
Robinson says the U.S. could see planted cotton acreage decline to 9 million in 2013, which would represent the low point of U.S. acreage in 2008 and 2009.
“With average abandonment and decent yields, we still could see 14 million bales of production. Adding in the 2012/13 carryover gives us a 20-million bale supply. If we export 11 million and use 3.4 million, that gives a similar ending stocks outcome for 2013/14 that we'll see in 2012/13.
“In other words, even with a big decline in planted acreage, we still could wind up with little fundamental rationale for significantly higher cotton prices than what we’ll see for the December ‘12 contract. I would project the likely range of December ‘13 at 65 to 85 cents per pound,” he says.
The 11 million export bales is a big “if,” says Robinson.
“Our biggest export customer is China, and China has 30-something million bales in government reserves right now. They already have their ‘use’ sitting on a shelf.
In the hands of bureaucrats
“It’s in the hands of Chinese bureaucrats, and no one knows what they’ll do. If anything happens that decreases that export projection, then it’ll only get worse.”
The big wildcards in the world cotton market include Chinese cotton stocks, polyester over-capacity, and cotton demand, he says.
If 2011 proved anything, says Robinson, it was that it doesn’t really matter what the weather is like in the United States or in Texas in terms of the price of cotton. “Drought was much worse last year, and the price of cotton went from $2 to 90 cents, mainly because it’s even more important that we’re in a global market, and we had plenty of cotton in the world.
“This year, we have been dry, and USDA has cut bales out of the production estimate. I don’t think that’ll have an effect on the market,” he says.
Robinson says he expect cotton futures will weaken once production uncertainties are removed from the market later this year.
One implication of lower prices is that growers should put more thought into their selection of crop insurance options, he says.
“Two years ago, their insurance base price was in the $1.20 range, and last year it was 93 cents, so they’ve had high base prices, and it worked out pretty good in a drought year.
“For this next year, if you buy a 65-cent policy and ignore the yield risk, it won’t be a much higher price than the loan rate.”
The current farm bill proposals for cotton basically tack on additional layers of coverage, says Robinson. “So if you bought a 65-cent revenue or yield policy, the new farm bill will add on coverage, and it’ll give some price protection but not a whole lot.
“We’re not going to have super low prices, but we’re also not going to have high ones. And even if you take stacks on top of a 65-cent revenue policy, you probably won’t cover your costs. This year, a revenue policy won’t give you enough price protection.”
There’s nothing in the current picture that will cause a price rally, he says.
“There were weather problems in India, but those appear to have been resolved in recent months. I think we’ll weaken to just below 70 cents, based on demand, and it won’t matter if we have a shortfall — that’ll only mean we have slightly less historically large ending stocks.”
One of the most important price influences affecting cotton is weak demand, says Robinson, and that won’t change anytime soon.
There was a time, says Robinson, when the world supply was 76 million bales, and now world ending stocks are that high.
“But we are returning to normal as far as supply and demand influences and fundamental influences on price.
“China is holding huge reserve stocks — they’re off the shelf, and they’ve created an artificial shortage, but it’s still the largest stored stocks we’ve ever seen.”