Used to be when cotton prices hit 75 cents, cotton producers would respond in a big way — acres would climb along with production, and prices would subsequently plummet. The prevailing wisdom was that the cure for high prices was — high prices.
But not in today’s commodities markets, where corn and cotton are in a fierce battle for acres.
“Cotton is not the only crop at historically high levels,” said Cliff White, senior vice president, Olam/Queensland Cotton Group, speaking at the Ag Market Network’s February conference call. “There is a big battle for acreage between cotton, corn and soybeans, and we are not going to see huge shifts to cotton that we might have traditionally seen.”
In January, the National Cotton Council’s annual survey of cotton producers indicated cotton plantings of 12.5 million acres. White says acreage may move to 13 million to 13.5 million acres, on cotton prices surging even higher after the NCC survey.
But even a million additional acres of cotton is still not a major gain in White’s view. “Depending on what happens with abandonment and yield, we could potentially see a crop of 19 million to 20 million bales, certainly not enough to dramatically change our supply and demand situation. Supply and demand will remain tight here in the United States.”
White says world weather will be the most important factor impacting the cotton markets in the coming months. “The cotton market cannot afford to have any significant weather problem in the major-producing countries in the coming season. The story that’s hit the last few days is the drought in China. Everyone has heard of the unusually weather conditions in Australia, and it’s very dry in west Texas.
“As we get into the planting of these crops, the market is going to be very sensitive to weather developments. We need to watch that very closely over the coming weeks. We can’t afford to have a slip up in production in any of the major-producing countries.”
USDA reported very little change in supply numbers in its February report on old crop cotton, “but it did reinforce for all of us that U.S. ending stocks at below 2 million bales is extremely tight. World stocks are pretty much the same, somewhere around 43 million bales.”
Stocks-to-use ratios are very low, around 10 percent in the Unites States, and in the world, 37 percent. “But it doesn’t matter how you look at these numbers. We have a very tight supply and demand situation. There is a requirement for the world to grow a lot of cotton. So we have to be very cognizant of the growing conditions.”
White noted that demand destruction, caused when prices rise so high that they discourage end users from purchases of raw cotton “has not occurred in this market over the last few months. The sales numbers continue to impress everyone. Net sales for this week (first week of February) were 111,000 bales. Demand is also strong for new crop.
“So despite these prices rapidly approaching $2 per pound on the nearby month, we don’t seem to be damaging the demand side of the equation. Spinners are beginning to have problems, not so much with the price of the product, but more in terms of getting working capital to keep their consumption levels high. That’s one of the main factors that could potentially affect the demand side of the equation.
“At the moment, it’s remarkable that the spinners have continued with a very strong appetite for cotton, which is a reason for this move upwards in price. Most people would have expected some decline in consumption with rapid increases in prices. But we have not seen that at this point. At the moment, we’re not seeing a slow down.”
White expects that cotton consumption will remain relatively strong, notwithstanding economic problems over the coming year. “This will keep a tight supply and demand situation. It looks like attractive prices are going to be with us for some time yet. But keep your eye on the weather. It’s going to be the most important factor over the next few months.”