By Henry Gantz
Last Thursday, USDA reported that ending cotton stocks would dip to 2.9 million bales by the end of this marketing year on July 31. Plexus, a multi-national cotton merchandising company, took an even bolder step on Friday, projecting that the U.S. would sell out of cotton before the new crop comes in this fall.
While that could happen in the strictest sense, what we may be into here is an issue of semantics. The U.S. could conceivably “sell out” of cotton, but it’s doubtful mills would “run out” of cotton before the new crop hits the pipe line. Remember, picking in the Rio Grande Valley and Coastal Bend areas of Texas is only 4 to 6 weeks away.
Even with U.S. stocks critically low, they’re not historically low, and you only have to go back to the 2003/04 crop year to find a lower stocks-to-use ratio than where we are today. USDA says we’ll end this crop year with an 18.53 percent stocks-to-use ratio, and we were at 17.23 percent in 2003/04. The lowest in nearly four decades came in 1994/95 at 12.86 percent.
“Going back to the 1980s, the lowest stocks numbers we’ve had on July 31 has never been below about 2.5 to 2.3 million bales – that’s been the bottom,” said Dr. Gary Adams, National Cotton Council Vice President of Economics and Policy Analysis. “Most of the 2.9 million bales USDA says we’ll have this July 31st is committed. In other words, somebody has probably bought it, it just hasn’t been delivered.
“There are always some export sales made in one marketing year that are not delivered until the next marketing year. You have to figure domestic mills want to have at least a few months of their needs covered prior to the new crop starting to come into the marketing channels. It’s not that the warehouses are empty, it’s just that somebody has already bought the cotton in them.”
Although the market didn’t initially react to what on the face of it should have been bullish news – ICE July was down almost 90 points on day the Plexus report was released – it has begun to climb. This morning, July was at 82.63, up 7 points, and December was at 79.56, up 9 points. The July/December spread has narrowed nearly 650 points. With less than 25% of new-crop cotton forward contracted, growers continue to have opportunities to lock in prices at profitable levels.
