John Robinson

The USDA February 2023 Cotton Outlook projects world cotton consumption bottoming at 110.7 million bales for the current 2022/23 marketing year.  They then forecast 2023/24 consumption recovering to 115.5 million bales due to: 1) post-Covid reopening in China with increasing GDP, 2) lower Chinese production and greater need for Chinese imports, and 3) an “unusual inventory dynamic” of pent-up cotton demand following previously Covid-disrupted deliveries of cotton textile goods.  Other bullish influences for cotton consumption include the competitively low prices of raw cotton, which appear to have translated to higher levels of U.S. cotton exports since January.

Beyond China, world GDP is also currently forecasted by the International Monetary Fund to rise slightly to 2.9% (Figure 1, dashed green line).  This is important to the cotton market because cotton consumption tends to rise with economic growth and fall with economic declines.  For example, the blue line in Figure 1 shows world cotton consumption ranging between about six and eight pounds per person per year.  The peaks and valleys of per capita cotton consumption coincide with the respective trends of world GDP.  This is not surprising since cotton-made apparel and home furnishing products are both semi-durable and somewhat discretionary.  

Growing expectations of stronger economies, increasing mill use, and stronger export demand are, in turn, bullish influences on ICE cotton futures.  In the near term, they could contribute to stronger old-crop prices, especially if the current hedge fund net short position is liquidated in a short covering rally.

There are, of course, counter influences. First, a bullish demand response would be somewhat self-correcting as mills generally buy less cotton at higher prices. It remains to be seen how long and how high the “unusual inventory dynamic” will push cotton prices.  In addition, there is a potential macro-economic risk shrinking the demand curve and putting downward pressure on prices.  The latter could result from strong recessionary influences due to high interest rates as central banks continue their attempt to lower inflation to target levels.  

Figure 1. World Per Capita Cotton Use and Global Economic Growth

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Robinson, John. “Competing Influences and Expectations for World Cotton Demand.” Southern Ag Today 3(16.1). April 17, 2023. Permalink

Photo by Pixabay: https://www.pexels.com/photo/full-frame-shot-of-cracked-pattern-255509/

U.S. cotton production is typically uncertain in any given year, in part because roughly half the acreage is in Texas.  Still, the 2023 season is starting off with a more than usual degree of uncertainty.

First, the early season forecasts of U.S. cotton plantings vary by as much as two million acres, i.e., from 9.5 to 11.5 million acres.  Such a discrepancy puts a premium on the milestone planting intentions reports from the National Cotton Council (released February 12) and USDA (March 31 Prospective Plantings report and June 30 Acreage report).

The weather is a second major source of variability.  The National Oceanic and Atmospheric Administration’s Climate Prediction Center (CPC) is forecasting a transition from the hotter/drier La Niña condition to a neutral influence by late Spring.  CPC further predicts the onset of the cooler/wetter El Niño condition by early Fall.  That’s all well and good, but there is uncertainty around all weather forecasts.  Will the beginning dryness lead to above average early season abandonment?  Or will neutral El Niño-Southern Oscillation (ENSO) conditions by planting time surprise us with timely planting rains and good growing conditions?

The third consideration is whether the recent signs of improving cotton demand will continue.  There is plenty of uncertainty about whether the broader economy is recovering or entering a double dip recession.  

These three variable situations outline some possible extremes.  If, for example, U.S. cotton growers plant a low level of acreage, and it continues dry, and abandonment is above average, and demand continues to recover, the result could be ending stocks below 3 million bales.  Historically, it suggests that Dec’23 futures might follow the seasonal path of the green line in Figure 1, strengthening as the growing season goes on.  In the context of this year’s price levels, it suggests a march back up through the 90s towards a dollar.

On the other hand, what if 11+ million acres are planted and receive timely rains?  That could lead to three million more bales of production than the first scenario.  If demand doesn’t recover enough to absorb these bales, the carryover outcome could be five or six million bales.  In years of building excess stocks, the historical seasonal average of December ICE futures reflects weakening prices.  The pattern of the blue line in Figure 1 could push prices under 80 cents.

Figure 1’s red line reflecting “Stable Carryover” years is simply the in between scenario, with middling implications for ending stocks and prices. The level of these seasonal averages isn’t as important as the pattern itself.  Time will tell how all these variables play out.  

Figure 1. December Futures Seasonal Average Price in Stable, Larger and Smaller Carryover Years

Author: John Robinson

Professor and Extension Economist

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Cotton Photo by Mark Stebnicki: https://www.pexels.com/photo/plantation-of-cotton-in-a-cropland-10287687/

Robinson, John. “Possible Extreme Outcomes for 2023 Cotton.” Southern Ag Today 3(7.1). February 13, 2023. Permalink

For planning purposes, it is never too early to think about next season’s opportunities and risks.  To start with, we’re still not settled on the size of the 2022 cotton crop. USDA forecasted the latter back in May at over 16 million bales, and their November forecast is two million fewer.  Many in the southern plains expect more downward revision.  If the old crop carry-out is the currently-forecasted three million bales or fewer, this will be the first contribution to what is shaping up as a tight new crop situation for the 2023/24 marketing year. 

The second consideration is new crop planting.  Relative prices of competing crops like feedgrains and wheat may induce fewer cotton acres being planted in 2023.  For example, if you take Dec’23 corn futures trading over $6 per bushel and Dec’23 cotton under 80 cents per pound, the result is a historically high ratio of corn futures prices to cotton futures prices.  History suggests that when pre-plant corn futures prices are this high in relation to cotton futures (presently around 8.0), we could expect cotton planted acres around nine million acres, all other things being equal (see Figure 1 below).  

Obviously, there are other competing crop prices to consider such as soybeans, peanuts, and wheat.  However, the corn:cotton model reflected in Figure 1 does a decent job incorporating the influences of those other competing crops. 

The third consideration is the lingering drought impact of the fading La Niña.  A relatively dry looking drought map implies at least average, if not above average, abandonment of cotton acreage in the southern plains for the 2023 crop, which will increase U.S. average cotton abandonment.  Nine million planted acres of cotton with average abandonment implies potentially very tight supplies for the 2023/24 marketing year.  It might imply an in-season weather market, with market volatility in anticipation of (or reaction to) milestone supply reports from USDA. 

In short, there may be stronger new crop prices, but they may gyrate sharply between planting and harvest, which is typically volatile weather market behavior.  

Figure 1. U.S. All Cotton Planted Acreage and Ratio of New Crop Corn:Cotton Futures Ratio.

Author: John Robinson

Professor and Extension Economist

jrcr@tamu.edu

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Robinson, John. “Looking Ahead to the 2023 Cotton Market.” Southern Ag Today 2(50.1). December 5, 2022. Permalink

The picture painted by the U.S. Department of Agriculture (USDA) of U.S. cotton production has been reframed several times this year already.  In August, USDA cut a historically large three million bales off of their previous month’s forecast.  The direction of that adjustment was not a surprise to anybody, but the size of it surely was.  Then, in September, USDA’s National Agricultural Statistics Service (NASS) reversed themselves and added a million and a quarter bales back to their estimate of U.S. cotton production^[1], now at 13.83 million bales of all cotton (i.e., upland and pima combined).   

Hopefully, and happily, we can expect the forecast to get more accurate going forward.  The reason for this is rooted in three sources of future information.  First, as we saw in USDA’s September forecasts, available USDA Farm Service Agency (FSA) certified acreage data were used to revise forecasted planted acreage.  This was the main reason for the September upward revision to U.S. cotton production this year.  New data on certified acres from FSA sometimes arises later in the fall or winter, so this remains a possible source of refinement.

Second, NASS surveyed more than 7,000 U.S. producers, including major cotton producing states.  This survey process includes what they call “objective yield surveys” for major crops.  For cotton, this means boll counts from randomly selected field samples in September, October, November, and December.  So again, this data flow suggests a more accurate forecast of U.S. cotton production over time.

Third, NASS also reports monthly on cumulative bales ginned, which is another independent (albeit lagged) measure of U.S. cotton production.  Altogether, we can expect fewer surprises and an increasingly clearer production picture.  This expectation is supported by historical data in Figure 1.   Figure 1 shows the percent deviations of USDA’s U.S. cotton production forecasts in August, September, November, and December, relative to the final production estimate at the end of the marketing year (i.e., the following July).  As expected, the spread of the percent deviations shrink across the fall season, presumably informed by the previously described data flow.  It is also apparent from Figure 1 that USDA tends to overestimate the crop size, at least in the September through December time period.

The marketing implication of this refinement is a fading production risk premium in U.S. cotton prices, all other things being equal. 

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^[1] https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/qr46s7546/kd17f282m/crop0922.pdf

Robinson, John. “Refinement of U.S. Cotton Production Forecasts“. Southern Ag Today 2(41.1). October 3, 2022. Permalink

Since mid-May, ICE cotton futures have witnessed an historic short-term collapse (see this article https://southernagtoday.org/2022/07/what-is-behind-the-recent-cotton-futures-market-plunge/ ).  In the two-month period between May 16 and July 14, the December ’22 contract fell over 49 cents.  In the last 40 years, there have only been six December cotton contracts with more than that total level of change, measuring from the contract high to the contract low.  The reason for the price decline has been attributed in the farm press and industry newsletters as “demand destruction” which is probably intended to mean both 1) a lower quantity demanded at the formerly high prices, and 2) an inward shift in demand in response to recessionary expectations.

Besides the major downward trend of this price movement, it is also associated with high volatility.  By volatility, I mean that prices are gyrating more variably and more quickly.  Historical volatility is a measure of the spread or risk of price movements over a defined period.  Figure 1 shows historical volatility in ICE December cotton futures during the period March through Mid-May.  The underlying measure of dispersion used in Figure 1 is the standard deviation of December futures settlements.

Contributing to the high volatility of the December ’22 contract were the strong price moves higher and lower, including many limit up and limit down moves.  Figure 1 indicates that the volatility of the December ’22 prices is approaching that of the notable price rally of 2010-11, which then reverted to more normal prices, a pattern that economists call “mean reversion”.  Like 2010-11, the current price movements will likely become smoother and less volatile, but perhaps not until the post-harvest season.  (Note: the 2010-11 price spike was triggered by a global supply shortage that was several years in the making.  In contrast, the 2021-22 price spike appears more demand driven.) 

The plunge in cotton futures represents a lost opportunity for growers with unsold or unhedged production this year.  The contribution of high volatility also increases the costs of marketing since more variable price moves increase the costs of hedging for growers or merchants.  The experience of high volatility in 2022 should serve as a reminder to growers about the riskiness of cotton price movements.  

Robinson, John. “More Volatile Cotton Prices“. Southern Ag Today 2(32.1). August 1, 2022. Permalink