Cotton Market Cotton Market OutlookOutlookJohn R.C. Robinson John R.C. Robinson

Professor and Extension Professor and Extension Economist-Cotton MarketingEconomist-Cotton Marketing

Department of Agricultural Economics Texas AgriLife Extension Service

Texas A&M University College Station, Texas

Southern Outlook Conference Atlanta, GA September 23, 2009

● Uncertain supplies and demand

● Summary of USDA’s September Cotton supply/demand numbers

● Cotton futures price forecast: – Dec09 between 55-65 cents– Dec10 up to the lower 70s?

Discussion PointsDiscussion Points

Supply UncertaintySupply UncertaintyTexas started off very dry, and has lost most dryland production below I-10.

The High Plains and Rolling Plains were spotty from a mix of dry/wet weather, and now are in a race for heat units, i.e., moisture is no longer the issue.

Last week’s cold snap will probably foster low micronaire. If it’s widespread enough, it could also reduce boll weight and yield per acre in NASS Districts 1N and 1S.

Supply UncertaintySupply UncertaintyElsewhere, moisture is the issue, in a bad way…

30% to 40% of Arkansas’ cotton looks like this…

● USDA-NASS field survey for October report at the end of the week (Oct 1)

● While they can make some subjective adjustments, it will be months before the measurable effect is known.

● Likely grade impacts; perhaps some trimming of the U.S. prod’n number (How much?)

Supply UncertaintiesSupply Uncertainties

● Lingering effects of recession on consumer sentiment, purchases

● Cotton is tied more heavily to the general economy

● When will the U.S. and world economies resume growth?

● Meanwhile, USDA world consumption is 113 million bales, down from 121 million

Demand UncertaintiesDemand Uncertainties

World Per Capita Cotton UseWorld Per Capita Cotton Use

0.006

0.007

0.008

0.009

0.01019

70/1

971

1971

/197

219

72/1

973

1973

/197

419

74/1

975

1975

/197

619

76/1

977

1977

/197

819

78/1

979

1979

/198

019

80/1

981

1981

/198

219

82/1

983

1983

/198

419

84/1

985

1985

/198

619

86/1

987

1987

/198

819

88/1

989

1989

/199

019

90/1

991

1991

/199

219

92/1

993

1993

/199

419

94/1

995

1995

/199

619

96/1

997

1997

/199

819

98/1

999

1999

/200

020

00/2

001

2001

/200

220

02/2

003

2003

/200

420

04/2

005

2005

/200

620

06/2

007

2007

/200

820

08/2

009

2009

/201

0

Marketing Year

LB

S.

Shaded bars represent historical periods of economic recession. Cotton consumption tends to drop during those periods due to fewer purchases of clothes, home furnishings, etc.

Monthly Nearby Futures Settlement Monthly Nearby Futures Settlement Price Vs. World Cotton Domestic UsePrice Vs. World Cotton Domestic Use

40

45

50

55

60

65

70

75

80A

04/0

5 O D F A JA

05/0

6 O D F A JA

06/0

7 O D F A JA

07/0

8 O D F A JA

08/0

9 O D F A JA

09/1

0

Marketing Year

Cem

ts/L

b.

100

105

110

115

120

125

130

135

Mil

lio

n 4

80 L

b.

Bal

es

Nearby Futures World Cotton Use

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

Sept. production/supply numberhas now been muddled by

recent weather events.

U.S. All Cotton Production, Percent U.S. All Cotton Production, Percent Change from August vs. JulyChange from August vs. July

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

2007/0

8

2008/0

9

August vs. July

Perc

en

t C

han

ge

U.S. All CottonPercent Change U.S. All Cotton

Percent Change

Mktg. Year August July % Mktg. Year August July %

1998/99 14.26 13.92 -2.38 2004/05 20.18 23.25 15.21

1999/00 18.30 16.97 -7.27 2005/06 21.29 23.89 12.21

2000/01 19.16 17.19 -10.28 2006/07 20.43 21.59 5.68

2001/02 20.00 20.30 1.50 2007/08 17.35 19.21 10.72

2002/03 18.44 17.21 -6.67 2008/09 13.77 12.82 -6.90

2003/04 17.10 18.26 6.78

Million 480 Lb. Bales

Calculation done by subtracting July minus August divided by August.

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

U.S. exports are influenced by overall demand uncertainty as

well as likely exportable Surplus from India

U.S. Exports of All CottonU.S. Exports of All Cotton

0

100

200

300

400

5008

/6/0

98

/13

/09

8/2

0/0

98

/27

/09

9/3

/09

9/1

0/0

99

/17

/09

9/2

4/0

91

0/1

/09

10

/8/0

91

0/1

5/0

91

0/2

2/0

91

0/2

9/0

91

1/5

/09

11

/12

/09

11

/19

/09

11

/26

/09

12

/3/0

91

2/1

0/0

91

2/1

7/0

91

2/2

4/0

91

2/3

1/0

91

/7/1

01

/14

/10

1/2

1/1

01

/28

/10

2/4

/10

2/1

1/1

02

/18

/10

2/2

5/1

03

/4/1

03

/11

/10

3/1

8/1

03

/25

/10

4/1

/10

4/8

/10

4/1

5/1

04

/22

/10

4/2

9/1

05

/6/1

05

/13

/10

5/2

0/1

05

/27

/10

6/3

/10

6/1

0/1

06

/17

/10

6/2

4/1

07

/1/1

07

/8/1

07

/15

/10

7/2

2/1

07

/29

/10

Weekly

Th

ou

san

d S

tati

stic

al B

ales

Export shipments this marketing year (blue line) started off below the needed weekly shipments (red line) to reach USDA’s forecasted target of 10.5 million bales of U.S. exports in 2009/10. Export shipments grew in August but dropped off since the recent rally in the futures market.

At higher prices, India will also be selling some of it’s reserve stock, perhaps crowding out U.S. exports.

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

At

this point

the bottom line

suggests a moderate

reduction in ending stocks

over the previous marketing year.

This suggests Dec09 futures

between 55-65 based

on the supply and

demand of

cotton.

The 55-65 trading range is implied by the historical The 55-65 trading range is implied by the historical pattern of Dec. futures when ending stocks didn’t pattern of Dec. futures when ending stocks didn’t change much from year to year. change much from year to year. (This involved data from a time (This involved data from a time when cotton prices were perhaps more influenced by the supply/demand of cotton.)when cotton prices were perhaps more influenced by the supply/demand of cotton.)

40

50

60

70

80

90

A S O N D J F M A M J J A S O N D

Cen

ts/L

b.

(mo

nth

ly)

40

50

60

70

80

90

Cen

ts/L

b.

(dai

ly)

Settlement Price (daily)

Stable Carryover

(’95, ’97, ’98, ’99) (monthly)

……However, if ending stocks are smaller than the However, if ending stocks are smaller than the previous year (i.e., if USDA revises forecasted previous year (i.e., if USDA revises forecasted production downward), expect production downward), expect level-slightly higherlevel-slightly higher pricesprices for harvest-time futures. for harvest-time futures.

40

50

60

70

80

90

A S O N D J F M A M J J A S O N D

Cen

ts/L

b.

(mo

nth

ly)

40

50

60

70

80

90

Cen

ts/L

b.

(dai

ly)

Settlement Price (daily)

S = Smaller Carryover (’89, ’90, ’93, ’94, ’02, ‘03) (monthly)

● Maybe the historical, seasonal patterns are less relevant

● The cotton market also continues to be influenced by the supply and demand of investment money.

On the other hand…On the other hand…

Net Positions ofNet Positions of Index FundsIndex Funds andand HedgeHedge FundsFunds vs.vs. Nearby Futures PricesNearby Futures Prices

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,0001/

24/0

62/

21/0

63/

21/0

64/

18/0

65/

16/0

66/

13/0

67/

11/0

68/

8/06

9/5/

0610

/3/0

610

/31/

0611

/28/

0612

/26/

061/

23/0

72/

20/0

73/

20/0

74/

17/0

75/

15/0

76/

12/0

77/

10/0

78/

7/07

9/4/

0710

/2/0

710

/30/

0711

/27/

0712

/25/

071/

22/0

82/

19/0

83/

18/0

84/

15/0

85/

13/0

86/

10/0

87/

8/08

8/5/

089/

2/08

9/30

/08

10/2

8/08

11/2

5/08

12/2

2/08

1/20

/09

2/17

/09

3/17

/09

4/14

/09

5/12

/09

6/9/

097/

7/09

8/4/

099/

1/09

Weekly

No

. of

Co

ntr

ac

ts

30

40

50

60

70

80

90

100

Ce

nts

/Lb

.

Index Funds Hedge Funds Nearby Futures

The fund sector has recently been behind the summer and September rallies in cotton

prices, but not enough to break the mid-60s.

Source: Commitment of Traders Supplemental Report (Futures and Options)

Technically Constrained between 57 & 65Technically Constrained between 57 & 65

This rally has been attributed to both speculative buying as well as well as the merchants being net long (more old crop hedge liquidation than new crop hedge selling).

World forecasted stocks-to-use was World forecasted stocks-to-use was lowered in September report – potentially lowered in September report – potentially

stable A-Index in the mid 60 cent rangestable A-Index in the mid 60 cent range

0102030405060708090

Au

g-9

9Ja

n-0

0

Au

g-0

0

Jan

-01

Au

g-0

1Ja

n-0

2

Au

g-0

2Ja

n-0

3

Au

g-0

3Ja

n-0

4

Au

g-0

4Ja

n-0

5

Au

g-0

5

Jan

-06

Au

g-0

6Ja

n-0

7

Au

g-0

7Ja

n-0

8

Au

g-0

8

Jan

-09

Sep

-09

Rat

io

0102030405060708090

Pri

ce

A-Index

Monthly Forecasted World Stks-to-Use

1/5

/04

2/2

/04

3/1

/04

4/1

/04

5/3

/04

6/1

/04

7/1

/04

8/2

/04

9/1

/04

10/

1/04

11/

1/04

12/

1/04

1/3

/05

2/1

/05

3/1

/05

4/1

/05

5/2

/05

6/1

/05

7/1

/05

8/1

/05

9/1

/05

10/

3/05

11/

1/05

12/

1/05

1/3

/06

2/1

/06

3/1

/06

4/3

/06

5/1

/06

6/1

/06

7/3

/06

8/1

/06

9/1

/06

10/

2/06

11/

1/06

12/

1/06

1/3

/07

2/1

/07

3/1

/07

4/2

/07

5/1

/07

6/1

/07

7/2

/07

8/1

/07

9/4

/07

10/

1/07

11/

1/07

12/

3/07

1/2

/08

2/1

/08

3/3

/08

4/1

/08

5/1

/08

6/2

/08

7/1

/08

8/1

/08

9/2

/08

10/

1/08

11/

3/08

12/

1/08

1/2

/09

2/2

/09

3/2

/09

4/1

/09

5/1

/09

6/1

/09

7/1

/09

8/3

/09

9/2

5/09

Daily

20

30

40

50

60

70

80

90

100

Cen

ts/L

b.Nearby Futures

AWP

“A” Index

Loan Rate (52¢)

““Loan Economics” may be in play for Loan Economics” may be in play for 2009/10 marketing year.2009/10 marketing year.

“A” Index of World Prices (as of 9/25/09) 65.22 Adjustment to US location and grade -16.37 Adjusted World Price (AWP)

48.85 Loan Deficiency Payment (=Loan-AWP) 3.15

Expect smaller but positive LDP’s this year due to world prices (green line) averaging around 60 cents for the marketing year.

Note: with new crop loan placements, merchant hedge selling may remove some of the current upside force on futures prices

2010 Thoughts2010 Thoughts

Dec10 has traded over 70 cents several times

Reportedly there has been aggressive forward pricing of foreign growths at these levels. Suggests increase in cotton acres outside the U.S.

● If Dec10 futures stay/return to 70 cents it may continue to buy foreign acres (same thing happened in Fall 2003 – Spring 2004).

● Suggests 2010 may not be a rosy “Wait til next year” kind of year.

● What may reinforce or diminish this outlook is how much foreign stocks are allowed to be drawn down.

2010 Thoughts2010 Thoughts

World Cotton Production and World Cotton Production and Consumption vs. Harvested AcresConsumption vs. Harvested Acres

85

90

95

100

105

110

115

120

12520

00/0

1

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

Marketing Year

Mill

ion

480

Lb

. Bal

es

65

70

75

80

85

90

Mill

ion

Acr

es

Production Consumption Harvested Acres

With economic recovery, 2010/11 world consumption may climb back towards 120M bales.

The economic recovery scenario implies the need for 7 – 8 million more acres of cotton. Some of this is likely being bought by Dec10 futures above 70 cents.

World Cotton Harvested Acres vs. World Cotton Harvested Acres vs. Nearby Futures Settlement PriceNearby Futures Settlement Price

30

35

40

45

50

55

60

65

7020

00/0

1

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

Marketing Year

Cen

ts/L

b.

65

70

75

80

85

90

Mil

lio

n A

cres

Nearby Futures Harvested Acres

•Will 2009/10 look like 2003/04?•Will Dec10 max out in lower 70s?

?

The Cotton Marketing PlannerThe Cotton Marketing Plannerhttp://agecon2.tamu.edu/people/faculty/robinson-john/index.htmlhttp://agecon2.tamu.edu/people/faculty/robinson-john/index.html

Welcome to John Robinson's Website on Cotton Marketing & Risk Management

Dr. John R.C. Robinson, Assoc. Professor and Extension Economist-Cotton Marketing, Department of Agricultural Economics, Texas AgriLife Extension Service, Texas A&M University, 2124 TAMU, College Station, TX 77843-2124

Ph:_(979) 845-8011 jrcr@tamu.edu

The Cotton Marketing Planner Newsletter focuses on farm-level implementation of strategies for Texas cotton growers to deal with yield and price risk. Contact me to receive it weekly by e-mail. Click to view what’s new on this page.

September 25, 2009

Cost ExpectationsA marketing plan is a contingency plan of actions that a grower would take in various possible, but ultimately uncertain, market situations. Developing and implementing a marketing plan begins with an updated estimate of expected production costs. Without accurate farm-specific cost information, it is impossible to set meaningful pricing goals to cover your production costs. Texas cotton growers have a number of available sources of information and programs to help them figure their production costs as accurately and completely as possible.

2009/10 Fundamentals and Outlook2009/10 U.S. Supply/Demand Projections . The September WASDE report made some small, offsetting adjustments to the U.S. numbers. Compared to their August numbers, USDA increased their forecasted production, first by raising the abandonment percentage from 14% to over 15%, and then raising the yield on the remaining harvested acres. This is in line with observations in West Texas of poor dryland crops and very good irrigated production prospects. The net effect was a couple hundred thousand more projected bales of production, which was basically carried over into the projected exports. After tinkering with the "unaccounted" number, the bottom line was no change in expected ending stocks for 2009/10. Hence, there was no supply/demand rationale for the market to react to this report, and it apparently did not. The projected range of U.S. farm price remained unchanged at 49-59 cents.