More Cotton Market Options and Factors to Consider for 2023

More Cotton Market Options and Factors to Consider for 2023

By Jim Steadman

How will growers manage expectations for 2023 when making their cropping decisions? It’s a tough question following the challenges of 2022 since  at this time  there are more options and factors to sort through than definite answers. 

It’s making it tough for market economists and specialists to determine the best recommendations and direction to share with growers. It may not be keeping them up at night, but it is challenging.   

“Right now, we still have pretty good prices on corn and soybeans,” says Dr. Aaron Smith, University of Tennessee Associate Professor and Extension Cotton Economist. “And one of my concerns is that input prices are remaining high. So, one of the things I think is prudent from a risk management standpoint is getting some price protection to help avoid that catastrophic margin squeeze. Fuel and fertilizer costs are high, and then commodity prices correct and come down 20%. I’m not suggesting that it’s a good opportunity to pick the final price, but most producers rely on crop insurance as their initial safety net. 

“Between now and when crop insurance prices are determined, there’s no price protection,” he adds. “The one thing I think producers really need to consider for whatever cropping mix they’re considering is providing some price protection with options markets. Whenever prices go up for using options contracts effectively, growers can end up mitigating some of that risk and at least spread that price risk out until crop insurance prices start.”   

One of the issues that Smith has in terms of production is what the pricing mix is going to look like. Right now, cotton is not price competitive with corn and soybeans for a lot of producers. He anticipates  regionalization in terms of what commodities are planted. And right now, there’s not a strong incentive for cotton.  

“I think there will be an acreage contraction, Smith notes. “Now, a lot can happen between now and when planting begins and ends. People who are heavily invested in supporting the infrastructure will likely wind up losing some of that acreage for corn and soybeans that offer better economic returns under the current environment.” 

That doesn’t mean that cotton is completely out of the mix. Smith says there are multiple factors to consider, including land expenses, costs for soil fertility, and yield potential. For 2023, this holds true across all commodities, not just cotton. 

“A lot depends on what your yield expectations are and where you are within the country right now,” he explains. “Looking at some of the initial numbers we’re running, we’re targeting a pretty high yield. But when you’re looking at pushing, I think it’s closer to that 90-cent mark in terms of breakeven for a lot of cotton producers.  

“Price volatility is crazy. We’ve seen it limit up one day and limit down the next, and you never want to play a guessing game. So, if growers still have unpriced cotton from 2022, they’re going to have to really decide if they want to carry that risk through the new year for some new pricing opportunities. Again, this volatility is not likely going away. We got down to 71 cents and are moving back towards 90 cents again. That’s a huge swing in terms of what that does for profitability.”  

To help manage that risk, Smith says growers should set some type of expectations, or at least some type of floor rate.  

“I know people are always a bit leery about spending money on things like options,” he says. “But the big question is how do you manage price risk between now and when you set your final sale? Just letting the market swing back and forth is a very risky undertaking right now. Prices could get back down into the 70s or maybe even the 50s, or we could see a 10-cent rebound where we get back to a dollar on the old crop.  

“I don’t think we’re getting anywhere close to that,” he adds. “Three to six months into the new year, I think we’ll see some better prices for the old crop than where they are right now. But growers have to recognize that it’s going to be a volatile ride.”  

Demand and Cotton Prices  

Dr. John Robinson, Professor and Extension Cotton Marketing Specialist with Texas A&M University, agrees.  

“We may have a very small crop,” he says. “If we have tight supply, that’s a set up for weather market volatility which is kind of unhelpful and unpredictable. What does that mean for a grower? It means the harvest time price may not be high and your insurance price may not be high. But it may be high in between briefly, periodically, and sporadically. Growers may want to reach out and grab some of those high prices with contracting or hedging.  

“Folks are going to have to be nimble with their marketing once they make a planting decision,” he continues. “Those big 40- to 50-cent price declines that we had in 2022 were both attributed to expectations of weakening demand and stagflation. China is importing less and even exporting some of their yarn. Ordinarily, they’d be an importer,” he says.  

Measured indicators show are that demand is slowing in China, which has created a lot of chatter about USDA’s consumption numbers being too high. That, Robinson says, creates a potential trade off. 

“We could have a very short crop in 2023. But if demand is off, maybe we won’t have prices trending up. They may just meander around where they are right now because it seems to be an open question about whether demand is declining or just not going anywhere.”  

Sorting Through Texas Concerns 

Texas may very well be the wild card in 2023 because of so many factors working at once, but not necessarily in unison. Growers have viable cropping alternatives in some parts of the state yet are limited in other areas. And what are the implications of the drought moving forward?  

“It’s a little bit different in Texas,” Robinson says. “It’s lower input and lower productivity, and a lot of growers don’t have any other choice. Cotton is the best choice, so they’re going to plant it. And if the price stays low, they’ll adjust what they put into the crop. But they’ll still go for cotton because it’s the best thing to grow if it’s dry, and it’s the best thing to pencil out as an insurance loss. Either way, it’s the most rational thing to do.” 

The Texas growers with the most flexibility are those that farm north of Amarillo where there are a lot of acres with enough irrigation water that they can grow cotton, corn, or wheat based solely on prices.  

“Around Lubbock, growers just don’t have the water to do that,” says Robinson. “They’re culturally and policy inclined to be cotton people. We know what they’re going to do.”  

Source: Cotton Grower
You can read the full article here: https://thrakika.gr/en/post/more-cotton-market-options-and-factors-to-consider-for-2023