As we move closer to spring and planting time, there are several key factors that will shape 2012 cotton prices. Generally, I think cotton farmers are encouraged by the level of futures prices (better than 90 cents) we’ve seen thus far for the 2012 crop, but we know the outlook is volatile and uncertain. No one knows where prices will go from here but direction will be impacted by several factors, when and if these occur, and in what combination. The following are some bullish and bearish indicators.
• Despite occasional good news, demand has been lackluster. In May 2011, world demand for the 2011 crop year was estimated at 119.5 million bales. Today, the estimate is just under 110 million. Over the past six to nine months, demand has eroded by almost 10 million bales due to global economic concerns and other issues. It will be hard for prices to stay in the 90s and move higher if demand does not begin to show consistent and solid improvement, and it’s anybody’s guess if and when that will occur.
• One bright spot in demand has been China’s purchasing cotton to rebuild its stocks. Despite this, China’s stocks may still end up a little on the low side compared to historical levels. If such purchases should continue into the 2012 crop, that would be a good sign. Granted, such purchases may only take place when prices move lower but would still act to keep prices from trekking even lower.
• World ending stocks (2011 crop still on hand when we begin the 2012 crop year) are expected to be almost 61 million bales. If realized, that would be up from 47 million for 2010 and 45 million for 2009. In other words, the “tight-stocks” situation that helped lead to $1.50 or higher cotton over the past two seasons has eased up quite a bit. This combination of increased stocks and declining demand hardly paints a pretty picture.
• The National Cotton Council has projected 2012 US cotton acreage at 7.5 percent below 2011. This is a little on the light side. I think the industry and the market were expecting a reduction of at least 10 percent. Given normal/good weather and more typical abandonment, the United States will no doubt make a larger crop in 2012 than in 2011 even with a sizeable reduction in acreage.
USDA’s first estimate will be released at the end of March. Soil conditions are still very dry in Texas and Georgia, so a “normal” growing season is not guaranteed. If U.S. acreage is reduced (and it likely will be, it’s just a matter of how much) and it turns out to be another dry year, prices would very likely rally.
Volatile Foreign Crop
Although U.S. production could be up even with some acreage shifted out of cotton, the foreign crop will most likely be down. Foreign production was up 9.3 million bales in 2011. China, India, Pakistan, Australia, Turkey and Africa were all up.
As in the United States, foreign cotton acreage is expected to be down in 2012. But unlike the United States, production may also be down. The net effect would be a reduction in world total production. This would support prices and even more if the United States is dry again and demand can begin to turn around. One thing fighting to counter this is the large increase in stocks as mentioned.
• I say all that to say this. Bullish and bearish forces in this market appear to be in a tug-of-war around the 90-cent area. Prices (Dec ‘12 futures) have recently peaked at the 97-cent area and then retreated. Prices have fallen to the mid-80s before rallying back.
• Interestingly, the 90-cent area also appears to be a critical one for the grower. As long as prices stay at 90 cents or better, the Council’s survey projection of a 7.5 percent reduction in acreage is probably about right. If prices trend higher into spring, acreage reduction could be less. If prices break below 90 cents, the reduction could be 10 to 12 percent or more.
• Despite the increasing stocks situation and USDA’s bearish February report, I hold to the belief that optimistically prices could move to the $1 range or higher. Pessimistically, prices could move to 80 cents or less.
It all depends on the factors mentioned here. If I were a grower, my objective for marketing the 2012 crop would be to get no less than 90 cents on as much of my crop as reasonably possible.
The outlook for 2012 prices is cautious and a bit more pessimistic due to increasing stocks and weak demand, but opportunities for good pricing may still exist.
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Don Shurley is professor and cotton economist with the University of Georgia. He can be reached via email at firstname.lastname@example.org or by phone at (229) 386-3512. Additional cotton information can be accessed at www.ugacotton.com or www.agecon.uga.edu.