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
May
-96
Oct
-96
Mar
-97
Aug
-97
Jan-
98Ju
n-98
Nov
-98
Apr
-99
Sep-
99Fe
b-00
Jul-0
0D
ec-0
0M
ay-0
1O
ct-0
1M
ar-0
2A
ug-0
2Ja
n-03
Jun-
03N
ov-0
3A
pr-0
4Se
p-04
Feb-
05Ju
l-05
Dec
-05
May
-06
Oct
-06
Mar
-07
Aug
-07
Jan-
08Ju
n-08
Nov
-08
Apr
-09
Sep-
09Fe
b-10
Jul-1
0D
ec-1
0M
ay-1
1O
ct-1
1M
ar-1
2A
ug-1
2
Marketing Year
Cen
ts/L
b. a
nd P
erce
ntag
e
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
Aug
-99
Jan-
00A
ug-0
0Ja
n-01
Aug
-01
Jan-
02A
ug-0
2Ja
n-03
Aug
-03
Jan-
04A
ug-0
4Ja
n-05
Aug
-05
Jan-
06A
ug-0
6Ja
n-07
Aug
-07
Jan-
08A
ug-0
8Ja
n-09
Aug
-09
Jan-
10A
ug-1
0Ja
n-11
Aug
-11
Jan-
12A
ug-1
2
Rat
io
020406080100120140160180200220240
Pric
e
“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
Jun-
11
Jul-1
1
Aug
-11
Sep-
11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Apr
-12
May
-12
Jun-
12
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
74/1
975
1975
/197
619
76/1
977
1977
/197
819
78/1
979
1979
/198
019
80/1
981
1981
/198
219
82/1
983
1983
/198
419
84/1
985
1985
/198
619
86/1
987
1987
/198
819
88/1
989
1989
/199
019
90/1
991
1991
/199
219
92/1
993
1993
/199
419
94/1
995
1995
/199
619
96/1
997
1997
/199
819
98/1
999
1999
/200
020
00/2
001
2001
/200
220
02/2
003
2003
/200
420
04/2
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
020,00040,00060,00080,000
100,000120,000140,000
2/7/
063/
21/0
65/
2/06
6/13
/06
7/25
/06
9/5/
0610
/17/
0611
/28/
061/
9/07
2/20
/07
4/3/
075/
15/0
76/
26/0
78/
7/07
9/18
/07
10/3
0/07
12/1
1/07
1/22
/08
3/4/
084/
15/0
85/
27/0
87/
8/08
8/19
/08
9/30
/08
11/1
1/08
12/2
2/08
2/3/
093/
17/0
94/
28/0
96/
9/09
7/21
/09
9/1/
0910
/13/
0911
/24/
091/
5/10
2/16
/10
3/30
/10
5/11
/10
6/22
/10
8/3/
109/
14/1
010
/26/
1012
/7/1
01/
18/1
13/
1/11
4/12
/11
5/24
/11
7/5/
118/
16/1
19/
27/1
111
/8/1
112
/20/
111/
31/1
23/
13/1
24/
24/1
26/
5/12
7/17
/12
Weekly
No.
of C
ontr
acts
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Cen
ts/L
b.
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?
60
70
80
90
100
J F M A M J J A
Cen
ts/L
b.
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
59.3
79.8
70.0 77
.0
76.5
76.1
68.9
64.1
84.3 93
.4
84.1
80.0
77.8
73.9
68.5
67.6
65.5
82.7
70.7
69.5
62.8 68
.4
95.5
98.5
151.
2
142.
0
106.
2
96.0
57.5
30.2 34.4
48.8
50.9 62
.9
56.2
51.1 54.6 59
.5 67.8
70.3
66.4
60.2
48.1 53
.9
28.5 35
.0 43.8
43.4
46.3
46.8 51
.7
39.1 45
.9 53.5
71.1
65.4 70
.7
020406080
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85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Cen
ts/L
b.
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 [email protected]
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.