Author: Yangxuan Liu

Cotton prices in 2022 were like a roller coaster ride, including increased volatility and the highest price achieved for the past decade (Figure 1). Multiple rapid market rallies in the cotton market were observed in 2022, followed by a quick withdrawal of speculative money, resulting in an immediate plunge in cotton prices after the rally. The highest daily spot cotton price for 2022 was achieved on May 4th at 149.76 cents per pound, and the lowest daily spot cotton price in 2022 was observed on October 31st at 72.26 cents per pound. Several factors contributed to the price volatility in 2022, including stock market volatility, soaring inflation, supply chain disruptions, rising interest rates, appreciation of the U.S. dollar, and severe drought in major cotton production areas.

In 2022, the U.S. planted 13.6 million acres of upland cotton, the highest in 3 years. However, harvested acres are forecasted by the U.S. Department of Agriculture to be only 7.7 million acres, indicating an overall U.S. abandonment rate for upland cotton of 43.4%, the highest on record. Severe drought conditions hit major cotton production areas, including Texas, Oklahoma, Kansas, and Missouri. The abandonment rate is estimated to be 68% for Texas which accounted for 58% of total U.S. planted cotton acres (7.9 million) in 2022. Due to drought, cotton production in the U.S. plunged in 2022 resulting in a 2.37 million bale year-over-year decline in cotton exports. The December 2022 USDA World Agricultural Supply and Demand Estimates (WASDE) report projected U.S. cotton production at 14.2 million bales for the 2022/2023 marketing year, slightly below U.S. cotton demand – 12.3 million bales of exports and 2.2 million bales of domestic mill use. Globally, in 2022, cotton production is projected at 115.7 million bales, above the world cotton mill use at 111.7 million bales.

Looking ahead, 2023 could be a challenging year for cotton producers. According to the International Monetary Fund October 2022 World Economic Outlook report, global economic growth is expected to slow down to 2.7%, combined with high inflation worldwide at 6.5%. The reduction in economic activity and high inflation in 2023 will likely continue to reduce consumer demand for discretionary items, such as textiles and apparel, thus suppressing cotton prices. 

In response to high inflation, the Federal Reserve increased the federal funds rate from about 0% in February to 4.25-4.50% in December. The interest rate increases were the largest since the 1980s. The Federal Reserve’s commitment to bringing inflation back down to its target of 2% will likely result in higher interest rates for producers in 2023. The bank prime loan rate has risen to 7.5% in December, up 4.25% since the start of 2022. Rising interest rates further accelerated the appreciation of the U.S. dollar. Cotton is a global commodity; on average, over 80% of cotton produced in the U.S. is exported. The appreciation of the U.S. dollar increases prices paid by foreign consumers and makes U.S. cotton less attractive compared to other cotton exporting countries with a relatively weaker currency. This could result in a further decline in cotton demand from the U.S. and lower cotton prices for U.S. producers in 2023. 

U.S. cotton acreage and production are likely to decline in 2023, due to a lower relative price expectations compared to competing crops. Additionally, profit margins for cotton producers have been adversely affected due to high input costs and low prices. As of December 15, 2022, December cotton futures prices, CTZ23 (Dec’ 23), are currently at 79.29 cents per pound. An optimistic futures price for cotton in 2023 is 80 to 85 cents per pound, and a pessimistic price for 2023 is 69 to 75 cents per pound. For planning and budgeting projections, a price of 72 to 78 cents per pound is suggested for 2023. On a positive note, an economic recovery could occur in the fourth quarter of 2023, and the winter ice in the cotton market could start to melt during the cotton harvest in 2023. 

Figure 1. Cotton Cash Prices for the past decade.

Yangxuan Liu

Assistant Professor

yangxuan.liu@uga.edu

Every year, the U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service (NASS) releases its projected harvest acres for U.S. cotton starting in August. The report provides updated information about expected U.S. cotton production. In 2022, the U.S. planted 12.3 million acres of upland cotton, the highest in 3 years, which was mainly due to historically high cotton prices during the decision-making and planting window. 

However, in 2022, the overall U.S. abandonment rate for upland cotton is estimated at 43.4%, which is the highest on record since 1953. The abandonment rate, which measures the percentage of unharvested acres compared to total planted acres, provides an estimate of the number of failed acres versus the number of acres that will be harvested. Severe drought conditions hit the largest cotton production regions in the Southwest (Texas, Oklahoma, and Kansas) and the West (California, Arizona, and New Mexico). The abandonment rate for Texas (Figure 1A) reached 69%. Texas planted 7.1 million acres of cotton in 2022 –  by far the largest of any state – representing 57.6% of total U.S. planted acres (Figure 1B). By contrast, drought impacts were less severe in the Delta (Missouri, Arkansas, Louisiana, Mississippi, and Tennessee) and Southeast (Alabama, Georgia, Florida, South Carolina, North Carolina, and Virginia). 

As a result of the drought conditions this year, upland cotton harvested acreage in the U.S. is projected at 7.0 million acres, which is the lowest amount of harvested acreage in over 150 years. The projected high abandonment rate in the U.S. reduced expected cotton production to 12.2 million bales, compared to the 10-year average of 16 million bales, according to USDA’s Foreign Agricultural Service. If realized, it would also be the smallest U.S. crop since 2009. U.S. cotton demand (mill use plus exports) for the 2022 crop is forecast at 14.3 million bales, exceeding production. As a result, ending stocks in the U.S. are expected to decline to 1.8 million bales, the lowest on record since 1960. The low supply of U.S. cotton provides support for domestic cotton prices. For the 2022/2023 marketing year, upland cotton prices are forecast at 97 cents per pound. If realized, it would be the highest price on record since 1909. 

Figure 1A. Abandonment rate for cotton-producing states in the U.S. in 2022

Figure 1B. Planted acres and harvested acres of the cotton-producing states in the U.S. in 2022 Abandonment Rate = 1 – Harvested Acre/Planted Acre

References and Resources:

U.S. Department of Agriculture. 2022a. Production, Supply, and Distribution Database. Washington, DC: U.S. Department of Agriculture, Foreign Agricultural Service. Available online: https://apps.fas.usda.gov/psdonline/

U.S. Department of Agriculture. 2022b. Quick Stats. Washington, DC: U.S. Department of Agriculture, National Agricultural Statistics Service. Available online: https://quickstats.nass.usda.gov/

Liu, Yangxuan. “High Abandonment Acres for U.S. Cotton Projected Due to Drought“. Southern Ag Today 2(37.1). September 5, 2022. Permalink

The cotton futures market is on the decline, having experienced a dramatic selloff starting June 17, 2022. As shown in Figure 1, December 2022 Cotton Future prices dropped from the May 17, 2022 high of 134 cents per pound to around 120 cents per pound on June 15, 2022, only to be followed by a plunge to a low of 91.2 cents per pound on June 28, 2022. The selloff has created concerns among cotton producers about this year’s profitability. What was the cause of the recent market plunge? 

Figure 1. December 2022 Cotton Future Prices for the Past Year

Since September of last year, the cotton futures market experienced an inflow of speculative money, which pushed cotton prices to levels that exceed those indicated by supply and demand fundamentals (more information here). The flow of speculative money in and out of cotton markets makes prices unpredictable and volatile. However, with the recent speculative money leaving the cotton market, prices fell sharply, possibly with a temporary correction below the price supported by global cotton supply and demand fundamentals. What caused this sudden withdrawal of money from the cotton market? 

Cotton and cotton-related products are discretionary items. Thus, cotton prices tend to follow the economy, with cotton prices rising during economic growth and declining during recessions. Many economic indicators point to the direction of a global economic slowdown, with the possibility of a recession in the United States. The S&P 500 index, one of the main indexes for the U.S. stock market, recorded a 20% drop in June from its January closing peak to confirm a bear market. Meanwhile, soaring inflation put extra pressure on consumers. The annual inflation rate in the U.S. accelerated to 8.6% in May of 2022, the highest since December 1981. Embedded in inflation, energy prices rose 34.6% and food costs surged 10.1%. Severe supply disruptions caused by geopolitical tension and Covid-19 reduced global economic productivity, hindered the ability to meet consumer demand, which resulted in an economic slowdown and high inflation rates globally. 

The soaring inflation, especially for food and energy, reduced consumer confidence and forced the consumer to rebalance their budgets for spending. This could lead to consumers reducing the purchase of apparel and apparel-related products. Meanwhile, in response to high inflation, the Federal Reserve increased the federal funds rate to tamp down inflation – on June 15^th the Federal Reserve increased interest rates by three-quarters of a percentage point, its largest rate increase since 1994 and the third rate increase in 2022. The Federal Reserve’s commitment to bringing inflation back down to its target of 2% indicates a strong possibility of further interest rate hikes in 2022 and 2023. The rising interest rate further accelerated the appreciation of the U.S. dollar, as the U.S. Dollar Index reached its three-year high at 104.01. Cotton is a global commodity; on average, over 80% of cotton produced in the U.S. is exported. The appreciation of the U.S. dollar increases prices paid by foreign consumers and makes U.S. cotton less attractive. All of these concerns contributed to the withdrawal of money from the cotton market and the recent decline in cotton prices from the peak. 

The impact of this year’s global cotton production on prices is yet to be seen. High cotton prices during the planting season attracted more cotton planted acres globally. However, the Southwest United States, the major cotton-producing region in the U.S., is experiencing severe drought and is anticipating lower production this year. Globally, the USDA June forecast for cotton production could reach 121.3 million bales, 4 million bales larger than last year. The projected USDA global ending stocks are maintained at a relatively low level at 82.7 million bales. Lower cotton production in the U.S. could provide some support for harvesting prices domestically. However, with a higher global cotton production forecast, global cotton prices could drop further if the global economy enters a recession and stock markets continue to experience losses for the remainder of this year. 

Producers who are not in a marketing pool are encouraged to develop a marketing plan to protect the harvest price, as it is risky to lock in high input prices without a marketing plan for the crop. In addition, producers can adjust their harvest price expectations and manage their in-season production decisions accordingly.

Liu, Yangxuan. “What Is Behind the Recent Cotton Futures Market Plunge?”. Southern Ag Today 2(29.1). July 11, 2022. Permalink

As farmers are planning for the new year, they have several factors to consider. Besides supply and demand uncertainties for cotton marketing and weather uncertainties for cotton production, we are in the middle of a supply chain crisis with rising input costs and limited supplies. Additionally, inflation is a major concern, with the latest annualized Consumer Price Index at 7.0 percent. Inflation translates into higher production costs for cotton producers. 

Cotton producers are wondering if they will be profitable this year under rising cotton prices and higher input costs. Figure 1 below shows the estimated costs of production for cotton in 2021 and 2022 from the University of Georgia Cotton Enterprise budgets. The total costs of production rose significantly for 2022 compared with 2021, with an average increase in total costs for irrigated land of 17.4% and a 24.7% increase in total costs for dryland production. Similar year-over-year increases in production costs have been reported for Tennessee (21% for irrigated and 27% for non-irrigated) and Mississippi (11% for irrigated and 12% for non-irrigated).^[1]This increase in input costs is largely driven by the rise in fertilizer costs, crop protection costs, land costs, and energy costs. Even though individual producers’ costs vary and are determined by their production practices, these estimates clearly show the increase in input costs year-over-year. 

To ensure profitability, producers need to have a sound plan for input use, particularly fertilizer application this year. Soil testing will allow producers to determine available nutrients and the profit-maximizing amount of fertilizer that should be applied. Additionally, producers should develop secondary plans for chemical applications (e.g., if product A is unavailable what other products can be used). All of this implies higher production costs and greater financial risk for this year and makes it more critical for producers to estimate and control their cost of production. 

The good news is high new crop cotton prices (December 2022 closed at 100.87 cents per pound on January 31, 2022), are providing potentially profitable outcomes. With a yield of 1,200 pounds per acre for irrigated land and 850 pounds per acre for dryland production, with the costs shown in the table, cotton producers would need to lock in prices at 89 cents per pound for irrigated land and 96 cents per pound for dryland to break even. Producers need to be cognizant of the elevated amount of money at risk and modify their marketing and risk management plans accordingly. Incrementally removing price risk when purchasing inputs will help mitigate some financial risk for cotton producers. As with every year, producers need to focus on managing their profit margin through sound risk management practices. 

Figure 1. The Rise in Variable Costs and Fixed Costs for Cotton Production in 2022. Source: University of Georgia Cotton Enterprise Budgets. Average of conventional tillage and strip-tillage production. Costs Exclude Land Rent.

 

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^[1] Budgets were created on different dates and have different specified costs, so some caution should be exhibited when comparing different states.

References

Estimate of 2022 Relative Row Crop Costs and Net Returns, Department of Agricultural & Applied Economics, University of Georgia, November 2021. https://agecon.uga.edu/extension/budgets.html

Cotton 2022 Planning Budgets, Department of Agricultural Economics, Mississippi State University, Budget Report 2021-01, November 2021. https://www.agecon.msstate.edu/whatwedo/budgets.php

2022 Cotton Budgets, Department of Agricultural and Resource Economics, University of Tennessee. https://arec.tennessee.edu/extension/budgets/

Liu, Yangxuan. “Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan“. Southern Ag Today 2(7.1). February 7, 2022. Permalink