Thursday, September 23, 2021

Stay Aware Of Market Risk

As Cotton Prices Rally, Caution Signs Grow On The Road Ahead

• By Yangxuan Liu,
University of Georgia •

caution signCotton prices surged recently to the lower 90-cents-per-pound range and even reached as high as 97.33 cents per pound for front month cotton futures (Cotton #2 Oct 21) Aug. 17.

Several contributing factors for the recent rally include:

• The record-high stock market.

• Speculation purchase of cotton futures.

• Weak U.S. dollar.

• Lower crop adjustment by the U.S. Department of Agriculture’s World Agricultural Supply and Demand Estimates Report.

• Chinese purchases of U.S. cotton.

Looking ahead for this year’s cotton crop, producers need to be aware of the market risk and the potential decline in cotton prices.

Prices Could Begin To Wane

Fuel is running out for the continued cotton prices. The weather conditions this year favor U.S. cotton production across the Cotton Belt. We could end up with a higher production level than expected with continuing favorable weather for the rest of the season. Whenever there is an increase in supply, cotton prices tend to trend down.

Additionally, increasing COVID cases due to delta variant in the United States and globally could stall economic recovery after an early rebound and impose higher market risks.

As cotton prices tend to follow the stock market, there are increasing market risks for cotton. Furthermore, China has significantly increased the purchase of U.S. cotton for 2020-21.

This is due to the Phase One Trade Deal. China agreed to purchase at least $40 billion worth of agricultural products for each of the two years (2020 and 2021). However, China’s purchase obligation under the Phase One Trade Deal will only last until the end of this year.

There is uncertainty for future years of Chinese cotton purchases. The recent high cotton prices might force overseas spinning mills to reduce cotton’s share of the spinning mixes and use more synthetic fibers.

Thus, the demand for cotton is expected to drop. With all of these factors, the pace of gains in cotton prices has slowed.

Consider Break-Even Prices

So what should producers do? Should they lock in the price for part of their 2021 crop or wait for the next round of price rallies to sell? As market uncertainty is unavoidable, the regret or feeling of missing the sale opportunity at the peak could be inevitable, too.

When it comes to prices, producers need to look into whether they can lock in the prices above their break-even points. Selling their cotton at break-even prices would ensure their operation will be economically sustainable. If they can sell their cotton above their break-even prices, it is a good marketing opportunity, and producers would profit from the sale.

According to the University of Georgia 2021 Crop Comparison Tool updated in May 2021 (Table 1), the break-even cotton prices for total costs in Georgia, which cover variable and fixed costs, range from 75 to 88 cents per pound.

cotton marketing chart with cotton prices decreasingAt the current cotton prices, producers would be able to cover their in-season variable costs for planting, growing and harvesting (variable costs) and also be able to cover their long-term depreciation costs (fixed costs).

Increasing Input Prices

Cotton producers also need to be aware of increasing input prices. As the pandemic severely disrupted the supply chain, there is a shortage of inputs globally, resulting in these price increases.

Also, inflation pressure in the United States and globally further pushes input prices. With these increases, farmers need to be more cautious about input usage.

Dr. Yangxuan Liu is assistant professor, Agricultural and Applied Economics Department, University of Georgia. Contact her at Yangxuan.Liu@uga.edu or 229-386-3512.

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