Southern Ag Today

Author: Darren Hudson

  • Cotton Acreage and Relative Prices

    Cotton Acreage and Relative Prices

    The first step to forecasting new crop supply and demand involves focusing on planted acreage. Economists emphasize the influence of price, i.e., that of cotton as well as the prices of competing spring-planted crops.  For example, the average new crop corn:cotton price ratio in the first quarter of the year (currently 6.1)  suggests between 10.5 and 11.0 million acres of U.S. all cotton planted in 2024.

    We can be a little more quantitatively precise than just eyeballing Figure 1.  A simple regression of cotton acreage as a function of the new crop corn:cotton ratio would predict 10.8 million acres of cotton planted.  This is based on more observations, going back through the Fall.

    But even with a presumably accurate point estimate, there are reasons to believe that number might be too high. First, general inflation has created a new threshold for input prices. While the cotton price is higher than the long-term average, the cost of inputs has accelerated faster than the output price, meaning that even at 80 cents with typical yields, many producers will be at or below their total cost of production. Even though 80 cents will often cover variable costs, that level of potential loss is unattractive. Who would have thought that 80-cent cotton would not be profitable? Not many. But the elevation of costs of production has brought us to a point where historical relationships are probably not nearly as accurate for predicting future behavior.

    Additionally, the insurance price for contracts this year are currently in the 80-cent range, which means that the revenue floor provided by insurance will not cover costs of production either (assuming 65-75% coverage levels). This fact will likely cause financers to demure on providing high levels of production loans. For those that self-finance, this locks in modest losses should a crop failure happen. Again, this makes planting less attractive. 

    Taken together, these facts suggest that simple models of planted acres are likely overstating intentions. It could be that cotton “loses least” in many producer portfolios, and they go ahead and plant cotton. But, producers with other alternatives may find cotton is not the best alternative.  

    Hudson, Darren, and John Robinson. “Cotton Acreage and Relative Prices.” Southern Ag Today 4(6.1). February 5, 2024. Permalink

  • The Drought, Exports, and Cotton Prices

    The Drought, Exports, and Cotton Prices

    The drought of 2022 in Texas has taken its toll on U.S. cotton production, with USDA forecast 13.8 million bales (mb) (or 3.7 mb lower than 2021). Lower output equals lower exports, with current forecasted exports of 12.5 mb, down 14% from the previous year (See Figure 1). That also means lower ending stocks, currently estimated at historically low levels of 2.8 mb. But the drought (and higher than average price) has not slowed exports, with roughly one-half of expected production already sold or shipped where China has been the largest destination so far this year.

    USDA data show the typical inverse relationship between crop size and farm price. And even though expected farm price is below last year, if realized, would be the second highest average farm price on record. 

    But there are concerns. Recent price action in the 22 and 23 December contracts have shown considerable weakness relative to earlier in the year. Recent lower prices would be expected to stimulate buying. In fact, exports do show strength. But there appears to be substantial selling pressure any time price moves up. And the market appears to be inverted with nearby prices above prices in out-month contracts suggesting current demand above future demand.

    What is perplexing is the relatively low DEC23 price (currently in the mid-70 cents per pound range). That price level is insufficient to cover anticipated costs in many regions of the U.S. Also, relative to grains, the price for the DEC23 contract appears to signal fewer cotton acres next year. There is still time for prices to realign, but the market may be signaling lower anticipated cotton demand in 23 driven by higher apparel prices (and general inflation). For now, cotton is moving globally, and the US is likely to end the 22/23 marketing year with historically empty warehouses.

    Figure 1. U.S. Cotton Exports and Farm Prices: 2017-2023

     Source: Figure reprinted from the October 2022 Cotton: World Markets and Trade Report, USDA, FAS. 
    https://www.fas.usda.gov/data/cotton-world-markets-and-trade
     

    Hudson, Darren. “The Drought, Exports, and Cotton Prices“. Southern Ag Today 2(43.4). October 20, 2022. Permalink

  • The Future for Cotton

    Cotton is a key crop for Southern agriculture and, like many other commodities in the South, is heavily export dependent. Unlike other commodities, we reimport a lot of cotton in the form of textiles which makes export demand more closely tied with U.S. import demand for finished goods. With economic and geopolitical uncertainty abound, some reflection on the cotton market and its risk exposure is helpful in long-term planning.

    Cotton is a global commodity.  While the U.S. is a major export supplier to the world, there are many other major growers. A drought in the High Plains of Texas has implications for U.S. total output but may not drastically change cotton prices. Brazil, India, China, Australia, and Africa all impact price as well and so global events (and weather) are key factors in the observed market price.

    Geopolitical concerns. China has been a key buyer of U.S. cotton but China’s strategic interests may not align with the U.S. over time. Cotton has been proactive at finding other buyers (Bangladesh and Vietnam for example), which is a good thing. The war in Ukraine indirectly impacts cotton through fertilizer and chemical prices and dislocations in prices in other competing commodities. So geopolitical concerns drive policy and prices but so far cotton has been ahead of the curve.

    Long-term projections. Long-term projections are often not worth much and in the case of this year the projections in Figure 1 were made before the Ukraine invasion. The story? Not much reason to expect a lot of change from the long-term average. The reality? There is a lot of uncertainty about geopolitical and weather events that will result in price volatility. Future relations with China are the one variable that gives cotton the most heartburn, but our supply chains are slowly adjusting to the new global reality.

    Figure 1. Long-term Baseline Projections

    Source: International Center for Agricultural Competitiveness, Texas Tech University, 2022 Baseline Projections.
    Note: Estimates were prepared before the Ukraine invasion.

    Hudson, Darren. “The Future for Cotton“. Southern Ag Today 2(15.4). April 7, 2022. Permalink