From the peak at near 88 cents in late February to the decline to near 76 cents in late March, cotton prices (new crop December futures) are trying to mount a comeback. Since the latest low, we’ve had 9 up days out of the last 13, and December now stands at 82 cents and change.
To be back over 80 cents is an encouragement. As we near planting time for most cotton areas, 80 cents or better is likely a factor in what direction cotton acres will take. I suspect for most growers, acreage decisions are pretty much a done deal by now. I’m just saying that 80 cents or better is likely the barometer that confirms to the grower if the “right” decision was made or not.
I’ve watched markets for 40 years – 30 of that for cotton. I can tell you that prices often overreact. They go too high and/or too low that isn’t justified by the economics, then they tend to “settle down” somewhere in the middle. What I’m saying is 88 cents was likely too high and 76 cents was likely too low. Now, the market’s job is to try and find a “comfort zone.” Economists have a fancy word for that – “equilibrium” – and this equilibrium price has to be discovered over time.
Moving forward, the key factors determining the direction of this market will include demand (as supported by export reports) and U.S. crop conditions and size.
USDA released its April estimates last week. I’ve heard and seen it said that the report was bullish. I’ll concur that it was to some degree, but the numbers likely weren’t that good enough to convince most of the market to yet jump back on the higher-prices bandwagon.
To summarize the April report:
- U.S. 2020 crop year exports were raised 250,000 bales. This was anticipated. Further increase may be coming in future reports.
- U.S. ending stocks for the 2020 marketing year were lowered 300,000 bales and could move even lower.
- World Use was increased roughly 400,000 bales from the March projection, including a 250,000 bale increase for China.
- Imports for China were raised 750,000 bales. Imports for Bangladesh were also raised. Exports for Australia were raised.
- World ending stocks for the 2020 crop marketing year were lowered 1.1 million bales.
The USDA May report will be the first estimates and forecasts (non-survey based) for the 2021 crop year.
The fundamentals for the 2020 crop and price are pretty much done. Exports and the demand side may yet increase further. If it does, that will further tighten carry-in stocks to the 2021 crop year and impact 2021 crop fundamentals. Given the uncertainties about U.S. plantings and getting off to a dry start in some areas, this could very well play into higher prices. The price of cotton is also being impacted by factors such as the value of the dollar and the price direction for other crops like soybeans and corn.
The latest export report for the week ending April 1 was good. Net sales were 286,000 bales, with the largest sales destinations being Vietnam, Pakistan and China. There were 8,600 bales in cancellations for China. Shipments were 405,000 bales, with the largest destinations being Vietnam, Pakistan, Turkey and China.
With not quite 13 weeks remaining in the 2020 crop marketing year, exports need to average about 391,000 bales per week to reach the current USDA projection of 15.75 million bales. We are on that pace or better. So, we could see the estimate of exports revised upward a little more.
The market is making a recovery from its recent dip lower. If demand remains strong and especially if the U.S. crop is concerning in any way, prices could yet move higher. I contend we are still at a “wobbly” stage of the market, however.
Most growers probably have protection already on some portion of the expected 2021 crop. How comfortable are you with where you are? This move back over 80 cents may be an opportunity to add on if you choose to do so.
Dr. Don Shurley is professor emeritus in the Department of Agricultural and Applied Economics at the University of Georgia, Tifton.
Source: Cotton Grower
