The cotton market is hot! Cotton has been one of the few decent performers in the ag sector in recent months. And this year’s rally has been fundamentally supported. The world’s cotton harvested area fell 4 Mil Hectares (9 Mil Acres) in 2015/16 – which was a function of depressed prices – and then fell another 1 Mil HA in 16/17.
The market has since rebounded as China no longer aims to boost its reserve stocks (Chinese acreage has fallen 50% since 2012), and the lack of planted area in major exporting countries has balanced supply and demand through lower production. This is not unlike the supply risk that the US wheat market faces as acreage falls near record low, thereby escalating weather issues and any loss of yield.
Rising US cotton prices should not come as a surprise. Old crop US cotton stocks are estimated at 3.2 Mil Bales, down 15% from 15/16, and we note US end stocks have only been lower than 3.2 Mil Bales six times since 1990. Meanwhile, US cotton prices, even at this year’s prices, maintained a competitive position against India and exports in 16/17 are pegged at a record high 14.5 Mil Bales. Our work has found that, like most raw materials, stocks/use correlates rather well with price over time, and US cotton stocks/use at just 18%, vs. 30% in 15/16, fits perfectly with a national average cash price of $.72-.75/Lb.
However, ARC advises caution against turning bullish at current prices. With normal weather in the US and across the Southern Hemisphere, a decent correction is expected in the second half of 2017.
Major cotton exporters across the world will respond to this year’s elevated price structure with an expansion in seeding. US cotton seedings are pegged at 12.2 Mil Acres, up 2.2 Mil (20%) from the previous year. Combined planted area in Brazil & India (which together with the US combine for 70% of global exports) are projected to rise 1.1 Mil Hectares. Growth in global cotton trade has been lackluster and assuming trend yield major exporters cotton stocks/use will be rising, not falling, in 2017/18 – and in the case of Brazil will be near record high.
Our work suggests the season average cash prices in the US will be closer to $.60-.62/Lb in 2017, and the futures market may have scored a peak high in early May. Like grain markets, there’s no shortage of supply, and there’s a certain price not too far above the market that expands acreage further. US producers will join the expansion.