Cotton Market Outlook

John Robinson Professor & Extension Economist-Cotton Marketing

Department of Agricultural Economics Texas A&M University

College Station, Texas

AAEA Grain Outlook Session August 14, 2012

Discussion Points● Lower/Uncertain 2012

production/weak demand● Fund/Fed influences● Dec’12 between 65-80 cents per lb.● Dec’13 between 65-85 cents per lb.

Cotton Fundamentals: The Return to Normalcy

Increasing U.S. ending stocks fits price pattern.

Historically high world ending stocks do too, but distorted by Chinese reserve stocks policy.

020406080

100120140160180200220

Dec

-95

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-96

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-96

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-97

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-97

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98Ju

n-98

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-98

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-99

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99Fe

b-00

Jul-0

0D

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p-04

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l-05

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-05

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Marketing Year

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erce

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U.S. Stks/Use Nearby Futures

U.S. Cotton Stocks-to-Use Show Fundamental Rationale for Price Movements…

(…except in 2010/11!)

August 95 – August 2012

0102030405060708090

100110120

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“A” Index

World Stocks-to-Use Show Similar Relationship to Price Movements

Monthly Forecasted World Stks-to-Use

● Not likely repeatable confluence of mill behavior and market shocks

● Induced regret, and other behaviors, among cotton producers and end users

● Higher production by foreign growers

● Reduced quantity demanded (cancelled export sales, less usage, switching to polyester)

Reflections on $2.00 Cotton

05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/130.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Central Asia African French Zone Other S. Hemisphere Australia Brazil India China

High Prices Stimulated More Foreign Production (Mil. Bales)

May

-11

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11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

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12

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-12

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-12

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-12

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Jul-1

2

Aug

-12105.00

107.00109.00111.00113.00115.00117.00119.00121.00123.00125.00

Mill

ion

480

Lb. B

ales Production

Consumption

High Prices Also Reduced Consumption: Monthly Forecasts of World Cotton Production

vs. Consumption, 2012/13 Crop Year

● European sovereign debt problem Financial solutions imply austerity by banks and consumers Implications for semi-durable discretionary goods

● Implies slow to negative economic growth in U.S. and Europe

● Historically this is associated with reduced demand for cotton

Weak Demand Outlook

World Per Capita Cotton Use

6.00

7.00

8.00

9.00

10.0019

70/1

971

1971

/197

219

72/1

973

1973

/197

419

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975

1975

/197

619

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977

1977

/197

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/198

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1981

/198

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1983

/198

419

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/198

619

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/198

819

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/199

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991

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/199

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/199

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1995

/199

619

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/199

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/200

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00/2

001

2001

/200

220

02/2

003

2003

/200

420

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005

2005

/200

620

06/2

007

2007

/200

820

08/2

009

2009

/201

020

10/2

011

2011

/201

2

Lbs.

/Pop

ulat

ion

Shaded bars represent periods of economic recession. Cotton consumption tends to drop during those periods due to fewer purchases of clothes, home furnishings, etc.

Source: USDA/ERS/WASDE

Lingering Drought Effects Will Likely Lower 2012 U.S. Prod’n

Not enough for a supply shock…

More like a little uncertainty premium into November.

Still, this drought map may be more influential

Recent Cotton Price Behavior

Short of late breaking, major supply shock (Indian harvest or Chinese reserve stocks), I envision Dec’12 cotton futures to weaken back below 70 cents as the production uncertainty is resolved.

I do not expect outside influences to change this general picture.

● Fund Sector was an early catalyst, but not the main force behind the 2010/11 rally.

● In 2011/12, the Specs contributed to volatility, more in a semi-weekly risk on/off money flows.1. Changing expectations of economic growth

= demand for commodities2. Often following euro/$USD shifts3. Changing expectations of QE3

Fund/Fed Influences

-40,000-20,000

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Weekly

No.

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acts

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Index Funds Hedge Funds Nearby Futures

January 3, 2006 Through August 7, 2012

Source: Commitment of Traders Supplemental Report (Futures and Options)

CFTC Snapshot of Net Position of Index Funds and Hedge Funds (No. of Futures Contracts)

● No major Spec influence short of meltdown in $USD

● The demand picture will remain weak from reduced consumption and poor/slow economic growth.

● For a while, this will be balanced by uncertain production.– September WASDE report influential– Production risk premiums starts to fade

Outlook for 2012

What About 2013?

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December 2012 Settlement Price

December 2013 Settlement Price

January 3, 2012 – August 10, 2012

What About 2013?● Consider 2007 when the 4,900,000 planted acres of

Texas cotton was 23% less than in 2006 – and pretty much for the same reasons. So let’s assume that U.S. planted acres of all cotton decline to 9.5 million.

● With avg. abandonment and yields, could still see 15M bales of production. Adding in likely 2012/13 carryover gives a 20 million bale supply. If we export 12 million and use 3.4 million, that gives a roughly similar ending stocks for 2013/14 and 2012/13.– Little fundamental rationale for significantly higher cotton prices

than this year’s range of the Dec ‘12 contract.

● Assumes no demand or policy shock in 2013/14. Chinese cotton stocks, polyester over-capacity, and cotton demand are the big wildcards.

Dec’13 Cotton Futures Could Follow 1995-98 Pattern

73.0

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Cen

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High Low

The years after ‘95 saw strong but

progressively lower price

ranges

The Cotton Marketing Plannerhttp://agecon2.tamu.edu/people/faculty/robinson-john/index.html

Welcome to John Robinson's Website on Cotton Marketing & Risk Management Dr. John R.C. Robinson, Assoc. Professor and Extension Economist-Cotton Marketing, Department of Agricultural Economics, Texas AgriLife Extension Service, Texas A&M University, 2124 TAMU, College Station, TX 77843-2124

Ph:_(979) 845-8011 jrcr@tamu.edu

The Cotton Marketing Planner Newsletter focuses on farm-level implementation of strategies for Texas cotton growers to deal with yield and price risk. Contact me to receive it weekly by e-mail. Click to view what’s new on this page.

August 7, 2012

Recent Price Patterns and Short-Term InfluencesRecent Price Pattern. The week ending Friday August 10 saw the Dec'12 cotton futures stair-step up from 74 to 77 cents per pound before declining on Friday to settle at 73.02 cents per pound on a bearish looking WASDE report (see below). Corn prices hit record highs Thursday and early Friday, but this did not carry into other ag markets. In terms of the general economy, there were mixed indicators this week, and the European financial crisis still appeared to affect currency, credit, equity, and commodity markets. Click here for a discussion of longer term fundamental influences on 2012/13 cotton futures. 2012/13 Fundamentals and OutlookThe 2012/13 cotton supply/demand picture was adjusted bearishly by USDA's August WASDE report with increases in on the supply side for both the U.S. and world, compared to the July numbers. The August report raised projected beginning stocks in in China by almost two million bales, outweighing small reductions to other countries' beginning stocks. Other Chinese adjustments in included half million bale adjustments to production (higher), imports (lower), and mill use (lower), for a net 2.38 million bale increase in projected Chinese ending stocks. The other notable foreign adjustments included a half million bale decrease in Indian production and a quarter million bale increase in Pakistani mill use. The bottom line was a 2.28 million bale net increase in projected 2012/13 world ending stocks to a record 74.67 million bales. This continues from last year the pattern of excess world production over consumption adding to ending stocks.