This is outlook season when different analysts, speakers, writers, and organizations present new cotton market outlooks. I consider some of these cotton outlooks as seasonal milestones, and I think it is useful to compare and contrast them. This comparison is not done as a criticism or in a competitive spirit – although there is always a little bit of “keeping up with the Joneses.”
The two milestones I have in mind are the National Cotton Council’s annual economic outlook report, and the cotton outlook analysis at USDA’s Outlook Forum. These two are usually not the first outlooks out of the chute. A lot of opinions and early grower survey results are circulated in early January at the Beltwide Cotton Conferences. The NCC report is usually published and presented in early February, incorporating survey data of grower planting intentions from around New Year’s. The USDA Outlook Forum is usually later in February, and often explicitly references the earlier NCC analysis.
The ultimate product of any crop market report is a balance sheet that lays out forecasted supply, demand, and excess supply (or “ending stocks”). The level and trend of ending stocks is the basis for predicting prices from a fundamental perspective. If ending stocks projections trend lower, either monthly or annually, we expect prices to range higher compared to the prior month or year, respectively, all other things being equal.
Table 1 shows the NCC balance sheet as of Feb. 12, the USDA Cotton Outlook as of February 19, and mine as of Feb. 20. As I said before, I think it is useful to compare and contrast the different assumptions, to let the reader see what is behind the next market analysis that they hear, whether from a public or private source.
I will focus my comparison on the underlying level of assumed abandonment, i.e., the fraction of planted acres that are not harvested. From now until August, everybody forecasts abandonment based on an average of historical abandonment from selected years and perhaps weighted by region. The NCC harvested acreage projection in Table 1 implies 2021 abandonment at 18.1%, which is down from 28.1% in 2020 but still above the long-term average. In other words, they expect the abandonment percentage (of a smaller planted acreage) to be a little worse than normal, but a lot less severe than in 2020.
USDA’s abandonment assumptions are clearly stated: “The projected national abandonment rate of approximately 17% is based on regional long-run averages, with the exception of the Southwest, where 2021 abandonment is projected at 25%.” The ad hoc forecast of southwestern abandonment is a common approach when current field conditions are historically severe. My ad hoc estimate of 28% national abandonment came from picking a historical U.S. abandonment from an above-average dry year within the last ten years. Translated: I think abandonment will be more severe than the other two forecasts. Maybe I’m a little biased from watering my lawn in Texas last summer. But time will tell. These are all reasonable approaches before the fact. These different abandonment assumptions times the planted acreage forecast explain most of the resulting differences in production and ending stocks across the three outlooks (Table 1).
Early season yield expectations are developed similarly to abandonment. Early acreage forecasts are based on relative prices or early surveys, and will eventually focus on the March 31 and June 30 surveys by USDA. Export forecasts are longer-term guesses, based on the economy, trade relations, and the current pace of U.S. exports. This is how the sausage is made. I thought you’d like to have the recipe.
Let me conclude with a side point about the role of public market information. Competitive markets run on the assumption of full and complete information. But, the structure of the global cotton market favors the big merchandisers with their contacts around the world. They are generally going to have new information sooner than farmers or public analysts. In addition, all of the major cotton merchants have a cotton economist to update their in-house cotton balance sheets. The fancy label for this situation is asymmetric information, and it can lead to private market inefficiency. I’m not accusing merchants of anything, mind you, because they paid for the data and expertise that they have. I am simply highlighting the equalizer role of market information and outlook supplied by the NCC, USDA, CFTC, ICAC, and universities.
I say again, ICE cotton futures prices are better for price discovery and risk management when all participants are well informed. Choosing between futures markets and public market information is a false dichotomy – they are both important. Publicly provided market information isn’t a panacea, but it’s a starting place and a leveling ground. Another way of keeping up with the Joneses. The alternative would be a futures market and private industry more subject to influence and manipulation from smoky back rooms.
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