Author: John Robinson

It is generally the case that the U.S. cotton market is influenced by aggregate production uncertainty.  One reason for this is that a majority of the U.S. acreage is planted in Texas (Figure 1), with much of that under dryland conditions contributing to historical abandonment rates between 4% and 62% statewide.  In drought years like the current one, this production risk is only heightened.  The management of this risk is potentially helped by publicly available market information data.

The first upcoming major information source is the May 12^th USDA “World Agricultural Supply and Demand Estimates” (WASDE) report published by the USDA’s World Agricultural Outlook Board (https://www.usda.gov/oce/commodity/wasde ).  The May report is notable for publishing USDA’s first official, comprehensive projections of U.S. and world crop supply and demand variables.  Historically, the May WASDE report tends to be closely watched and is frequently associated with cotton market volatility.

Like other crops, U.S. cotton is monitored by weekly crop condition reports and crop progress reports (on Mondays) from USDA’s National Agricultural Statistics Service (NASS, https://www.nass.usda.gov/).  Because cotton is a perennial bush in its native habitat, its growth and response to stress are different from annual grain crops.  Hence there is less correlation between weekly crop conditions and progress for cotton yield outcomes compared to grains.  Nevertheless, the news media and some market analysts pay attention to these weekly observations between the major report milestones.

June 30^th “Planted Acreage” is another closely watched major report that is conducted by USDA/NASS.  This report is sometimes associated with market volatility when it contradicts expectations based on the March 31^st “Prospective Plantings report from USDA.  USDA’s Farm Services Agency (FSA) provides supplemental acreage information with periodic certified acres data through the summer (https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index ). 

For U.S. cotton, the September WASDE report represents the first extensive proven yield sampling for areas outside of South Texas, in addition to grower interviews.  This sample-based production estimate is refined in subsequent WASDE reports through December, as well as with data on cotton ginnings.  The uncertainty about cotton yield may be further exacerbated in 2022 from restricted input applications.  For example, anecdotal evidence of reduced quantities of nitrogen fertilizer applications (due to the higher cost) could contribute to lower-than-average yields.   The resulting yield effect from fewer inputs might not be realized until the ginnings data in November.  Hence, this season could involve extended price volatility beyond the normal resolution of weather market uncertainty.

Robinson, John. “Milestone Indicators of U.S. Cotton Supply and Demand“. Southern Ag Today 2(20.1). May 9, 2022. Permalink

The conflict between Russia and Ukraine has direct implications on the global supply of corn and wheat because of the relatively large quantities of those crops that those two countries produce and export. It is not surprising then that grain futures have risen sharply since the conflict began.

Neither Russia nor Ukraine are importers or exporters of cotton.  So, the war and potential disruption of Black Sea shipping should have little direct effect on cotton trade.  The impact on world cotton markets is more indirect, with a cotton price impact delayed and uncertain. 

Relative prices of major U.S. crops have changed since the conflict began.  For example, during January and early February, the ratio of CBOT Dec’22 corn to ICE Dec’22 cotton futures ranged between 5.7 and 5.9.  Historically that outcome would have been associated with 12 to 13 million acres of all U.S. cotton planted (Figure 1).  Such a level conforms to the early grower surveys of intended plantings, and also to USDA’s Outlook Forum forecast of U.S. cotton planted acreage.

More recently, however, as corn prices have risen, the corn: cotton futures price ratio has shifted higher, e.g., as of March 14, it was 6.3 (see Figure 1).  The associated level of cotton acreage is roughly a million fewer acres compared to predictions from earlier in the year. 

Now, the previous change can only happen if growers have enough time and the right technology (e.g., herbicide programs, seed availability) to adjust crop mixes at this late date.  This point highlights the generally uncertain outlook picture for 2022.  Assuming fewer cotton acres, the result would tighten up the U.S. cotton balance sheet and support summertime futures prices at higher levels than previously expected.  Over the past 10 years, U.S. cotton has been responsible for a third of global cotton exports. The weather market volatility implied by the drought in the southern plains could be significant for prices and be further exacerbated by uncertainty about input decisions.  The latter includes fuel and potash fertilizer, the costs of which could rise directly from trade disruptions out of Russia.

Robinson, John. “Indirect Effects of the European Conflict on Cotton“. Southern Ag Today 2(15.1). April 4, 2022. Permalink

Production and supply of a crop is a critical component for the market outlook for every marketing year.  For the cotton crop, U.S. planted acreage outcome is a major part of the global cotton production and supply.

Grower surveys are one common method for predicting cotton planted acreage. One of the earliest publicly available grower planting intentions surveys is measured in December by Cotton Grower magazine and published in early January.  Similarly, the National Cotton Council measures grower intentions in the weeks before and after New Year’s Day and publishes the result in February.  In 2022, these two surveys measured 12.5 million and 12.0 million planted acres of U.S. all cotton (upland and Pima combined), respectively.  USDA will subsequently measure grower planting intentions in March, and then survey planted acreage in June.

A second approach to predicting cotton plantings is by focusing on the relative price of competing crops.  In the eastern half of the Cotton Belt, cotton competes largely with corn, soybeans, and peanuts.   In the Southern Plains region, the major alternatives are corn, sorghum, and wheat-fallow.  A simple method for predicting cotton plantings is, for example, matching the ratio of new crop corn and cotton future prices to U.S. cotton plantings (Figure 1). So far, the Dec’22 CBOT corn/Dec’22 ICE cotton futures price ratio has been ranging between 5.7 and 5.9 during the first quarter of 2022.  Assuming the price ratio stays at that level, history suggests an outcome of between 12 and 13 million planted acres of U.S. all cotton (see Figure 1). This is similar to the early surveys of growers.

Note that the dryer-than-normal conditions in the central and western Cotton Belt, along with an insurance price above $1.00 per pound, could add 500,000 to 1,000,000 planted acres in the Southern Plains region, albeit with uncertainty in the abandoned acres at the end of the season due to possible drought impacts.

Assuming 13 million planted acres in the U.S. with an average/higher abandonment (20%) and 10-year average yield (850 lbs), the U.S. would produce over 18 million bales of cotton in 2022, with over 21 million bales of supply.  Assuming U.S. domestic spinning is 2.6 million bales and U.S. exports are 15 million bales, the result could be another year of U.S. ending stocks around four million bales.  That year-over-year change in ending stocks would be considered price neutral.  This year that suggests that new crop futures prices may be fundamentally supported at historically high levels, with weather market speculation providing additional upside volatility.

Figure 1. Ratio of December Corn/Cotton Futures and All Cotton Planted Acreage in the United States

Robinson, John. “U.S. Cotton Planted Acres“. Southern Ag Today 2(11.1). March 7, 2022. Permalink

It is commonly assumed that a stronger U.S. dollar is a bearish influence on export commodities like cotton.  While that is often true, it is not quite that simple.  Figure 1 compares the inverse pattern of “nearby” (i.e., soonest to expire) ICE cotton futures prices (in red) and an index (in blue) of the U.S. dollar relative to a basket of six currencies: the Euro, Japanese yen, British pound sterling, Canadian dollar, Swiss franc, and the Swedish krona. Those six countries and their currencies have little to do with international cotton exports or imports. However, to the extent that U.S. dollar strength (for whatever reason) against these currencies coincides with U.S. dollar strength versus cotton exporting countries (e.g., Brazil, Australia, Central Asia, and sometimes India), then this chart may reflect situations where a strengthening dollar is directly associated with lower U.S. export competitiveness. The lower U.S. export competitiveness could transform into lower U.S. domestic cotton prices.  As a result, we see an inverse pattern in Figure 1. However, there are periods of time reflected in Figure 1 where the inverse relationship breaks down, e.g., in the center of Figure 1 during 2013. That period coincided with a time when European sovereign debt was weakening the euro relative to the dollar, which represents a distortion to what this chart is trying to explain. 

Figure1. U.S. Dollar Index versus Nearby ICE Cotton Futures Settlement Price

A potentially cleaner comparison would be of the U.S. dollar versus the Brazilian real or the Australian dollar.  The more cotton-specific impact of the U.S. dollar value on U.S. exports can be inferred from USDA trade-weighted exchange rate indices.   Looking back at these kinds of indices will show time periods like, for example, in 2015 when the U.S. dollar got 6.4% stronger (year-over-year) compared to the currencies of the specific countries that we trade cotton with.  This means that U.S. cotton was roughly that much more expensive to foreign buyers compared to other cotton exporting countries.

Lastly, to the extent that large financial institutions (investment banks, hedge funds) are moving money across asset classes, a rise in the dollar could reflect a risk off shift of investment out of stocks and commodities (driving down cotton futures, all other things being equal) and into U.S. treasuries. This would presumably be reflected in a rising U.S. dollar. Parts of Figure 1 may be explained by such movements, and they have little to do with cotton economics or export competitiveness.

Robinson, John. “The U.S. Dollar’s Influence on ICE Cotton Futures“. Southern Ag Today 2(4.1). January 17, 2022. Permalink

Squeeze situations in financial markets have been in the news this year.  In early 2021, the stock of the company GameStop was subject to extreme price volatility as a large number of short sellers were forced to buy back their positions while other traders were buying the stock aggressively.  Squeeze plays exist in commodity futures markets, too.  A common example of this can happen with short speculators in a rising futures market.  Assuming those speculators can’t deliver the physical commodity against their short futures position, they are left having to buy their way out of their short futures position, which contributes to upside price volatility.   

A different version of this short squeeze situation is playing out in ICE cotton futures in the current marketing year.  The set-up for this situation involves a number of things.  First, there is a physical supply imbalance in the form of the very low level of physical “certified stocks” of cotton that are eligible for delivery against ICE cotton futures contracts, as shown in Figure 1.  Daily certified stock levels are published daily by the ICE.  

Second, there is a historically high level of “unfixed call sales” contracts, especially on the Mar’22, May’22, and Jul’22 cotton contracts.  Unfixed call sales represent un-finalized basis contracts between merchants and mills which will eventually require buying of futures to fix the price. This situation is reflected by weekly data published by the U.S. Commodity Futures Trading Commission.  

Third, there is also historically large, long speculative positioning in ICE futures, including both hedge funds and index funds.  With the current expectations for rising inflation, speculators who are long cotton futures may hang on to, or even expand their long futures position in ICE cotton.  This could lead to continued futures price volatility, especially during February, April, and June. 

Chart Source:  Author compiled with data from USDA Ag Marketing Service (https://www.ams.usda.gov/market-news/cotton-tobacco ) and cotton certified stocks from the Intercontinental Exchange (https://www.theice.com/marketdata/reports/4/product/588/hub/732/isOption/false/isSpread/false ).

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Robinson, John. “Current “Squeeze” Dynamics in ICE Cotton Futures.” Southern Ag Today 1(50.1). December 6, 2021. Permalink