Cotton Market Cotton Market OutlookOutlookJohn R.C. Robinson John R.C. Robinson

Professor and Extension Professor and Extension Economist-Cotton MarketingEconomist-Cotton Marketing

Department of Agricultural Economics Texas AgriLife Extension Service

Texas A&M University College Station, Texas

● Old Crop Situation: Uncertain supplies and demand

● Summary of USDA’s December Cotton supply/demand numbers

● New Crop price forecast: – Dec10 pattern may have higher prices

leading to lower prices

Discussion PointsDiscussion Points

Supply UncertaintySupply UncertaintyTexas started off very dry, and has lost most dryland production below I-10.

The High Plains and Rolling Plains have spotty from a mix of dry/wet weather, hail, etc. It is a very late crop.

Mid-South experienced unprecedented harvest-time rainfall that damaged their crop.

● Lingering effects of recession on consumer sentiment

● Cotton is tied more heavily to the general economy

● When will the U.S. and world economies really turn the corner?

Demand UncertaintiesDemand Uncertainties

World Per Capita Cotton UseWorld Per Capita Cotton Use

0.006

0.007

0.008

0.009

0.01019

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

0

Marketing Year

LB

S.

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

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

2009 supply question is mostly resolved by this time

with further tinkering likely

Net Positions ofNet Positions of Index FundsIndex Funds andand HedgeHedge FundsFunds vs.vs. Nearby Futures PricesNearby Futures Prices

The fund sector has helped fuel the Fall rally in cotton prices,

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

Supply/Demand Numbers For Supply/Demand Numbers For Old Crop and New Crop Cotton Old Crop and New Crop Cotton

The demand side still has lot of lingering uncertainty from the recession impact.

U.S. Exports of All CottonU.S. Exports of All Cotton

0

100

200

300

400

500

8/6

/09

8/1

3/0

98

/20

/09

8/2

7/0

99

/3/0

99

/10

/09

9/1

7/0

99

/24

/09

10

/1/0

91

0/8

/09

10

/15

/09

10

/22

/09

10

/29

/09

11

/5/0

91

1/1

2/0

91

1/1

9/0

91

1/2

6/0

91

2/3

/09

12

/10

/09

12

/17

/09

12

/24

/09

12

/31

/09

1/7

/10

1/1

4/1

01

/21

/10

1/2

8/1

02

/4/1

02

/11

/10

2/1

8/1

02

/25

/10

3/4

/10

3/1

1/1

03

/18

/10

3/2

5/1

04

/1/1

04

/8/1

04

/15

/10

4/2

2/1

04

/29

/10

5/6

/10

5/1

3/1

05

/20

/10

5/2

7/1

06

/3/1

06

/10

/10

6/1

7/1

06

/24

/10

7/1

/10

7/8

/10

7/1

5/1

07

/22

/10

7/2

9/1

0

Weekly

Th

ou

san

d S

tati

stic

al B

ales The first export report of this marketing year (red dot)

came in below the needed weekly shipments (blue line) to reach USDA’s forecasted target of 10.5 million bales of U.S. exports in 2009/10.

Rising A-Index of World Prices in Rising A-Index of World Prices in Response to Declining Stock ForecastsResponse to Declining Stock Forecasts

0102030405060708090

Au

g-9

9Ja

n-0

0

Au

g-0

0Ja

n-0

1

Au

g-0

1Ja

n-0

2

Au

g-0

2Ja

n-0

3

Au

g-0

3Ja

n-0

4

Au

g-0

4Ja

n-0

5

Au

g-0

5Ja

n-0

6

Au

g-0

6Ja

n-0

7

Au

g-0

7Ja

n-0

8

Au

g-0

8Ja

n-0

9

Au

g-0

9D

ec-0

9

Rat

io

0102030405060708090

Pri

ce

A-Index

Monthly Forecasted World Stks-to-Use

The resulting stocks-to-use, and the upward revision from last month are both bearish.

1/5

/04

2/2

/04

3/1

/04

4/1

/04

5/3

/04

6/1

/04

7/1

/04

8/2

/04

9/1

/04

10/

1/04

11/

1/04

12/

1/04

1/3

/05

2/1

/05

3/1

/05

4/1

/05

5/2

/05

6/1

/05

7/1

/05

8/1

/05

9/1

/05

10/

3/05

11/

1/05

12/

1/05

1/3

/06

2/1

/06

3/1

/06

4/3

/06

5/1

/06

6/1

/06

7/3

/06

8/1

/06

9/1

/06

10/

2/06

11/

1/06

12/

1/06

1/3

/07

2/1

/07

3/1

/07

4/2

/07

5/1

/07

6/1

/07

7/2

/07

8/1

/07

9/4

/07

10/

1/07

11/

1/07

12/

3/07

1/2

/08

2/1

/08

3/3

/08

4/1

/08

5/1

/08

6/2

/08

7/1

/08

8/1

/08

9/2

/08

10/

1/08

11/

3/08

12/

1/08

1/2

/09

2/2

/09

3/2

/09

4/1

/09

5/1

/09

6/1

/09

7/1

/09

8/3

/09

9/1

/09

10/

1/09

12/

11/0

9

Daily

20

30

40

50

60

70

80

90

100

Cen

ts/L

b.Nearby Futures

AWP

“A” Index

Loan Rate (52¢)

Thus, “Loan Economics” may be less Thus, “Loan Economics” may be less of a factor in 2009/10 marketing year.of a factor in 2009/10 marketing year.

A-Index Composition (all 1-3/32")MOT Midd             52.00Memphis/Eastern Midd   52.25Brazilian Midd          53.50Pakistan Type 1503      54.50Benin BELA             54.50

“A” Index of World Prices (as of 12/11/09) 75.07 Adjustment to US location and grade -16.37 Adjusted World Price (AWP)

58.70 Loan Deficiency Payment (=Loan-AWP) 0.00

Expect smaller LDP’s this year due to world prices (green line) averaging around 60 cents.

Looking Ahead to Next YearLooking Ahead to Next Year

The 1st question is howmany acres get planted inresponse to high prices

The 2nd question is will the resulting world supply be not enough or more than enough to meet the world’s requirements.

When ending stocks don’t change much from year When ending stocks don’t change much from year to year, the pattern of Dec. futures is to gently trend to year, the pattern of Dec. futures is to gently trend lower over the fall. We could follow this pattern if the lower over the fall. We could follow this pattern if the numbers work out as projected in my previous table.numbers work out as projected in my previous table.

50

60

70

80

90

A S O N D J F M A M J J A S O N D

Cen

ts/L

b.

(mo

nth

ly)

50

60

70

80

90

Cen

ts/L

b.

(dai

ly)

Dec’10

Avg. Dec Futures in Stable Carryover Years

(’95, ’97, ’98, ’99)

In years when the ending stocks increase, the pattern In years when the ending stocks increase, the pattern of harvest-time prices is to fall harder in the summer of harvest-time prices is to fall harder in the summer and fall. This could happen with lots of supply and and fall. This could happen with lots of supply and

fuzzy demandfuzzy demand

50

55

60

65

70

75

80

A S O N D J F M A M J J A S O N D

Cen

ts/L

b.

(mo

nth

ly)

50

55

60

65

70

75

80

Cen

ts/L

b.

(dai

ly)

Dec’10 futures

Avg. Dec. Futures in Larger Carryover Years

(’91, ’92, ’96, ’00, ’01, ‘04)

The last time we had high winter-time prices The last time we had high winter-time prices was in 03-04. It created a supply response that was in 03-04. It created a supply response that outweighed demand, leading to lower prices.outweighed demand, leading to lower prices.

40

4550

5560

65

7075

80

A S O N D J F M A M J J A S O N D

Cen

ts/L

b.

Dec’04 Settlement Price

Dec’10 Settlement Price

World Cotton Harvested Acres vs. World Cotton Harvested Acres vs. Nearby Futures Settlement PriceNearby Futures Settlement Price

30

35

40

45

50

55

60

65

7020

00/0

1

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

Marketing Year

Cen

ts/L

b.

65

70

75

80

85

90

Mil

lio

n A

cres

Nearby Futures Harvested Acres

75+ cent Dec10 futures could attract a LOT of world acreage (as happened in early 2003/04), the resulting oversupply will pressure prices for the rest of the marketing year.

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

November 20, 2009

Cost Expectations

2009/10 Fundamentals and Outlook

A marketing plan is a contingency plan of actions that a grower would take in various possible, but ultimately uncertain, market situations. Developing and implementing a marketing plan begins with an updated estimate of expected production costs. Without accurate farm-specific cost information, it is impossible to set meaningful pricing goals to cover your production costs. Texas cotton growers have a number of available sources of information and programs to help them figure their production costs as accurately and completely as possible.

2009/10 U.S. Supply/Demand Projections . The November WASDE report made few albeit substantial adjustments to the Foreign and U.S. cotton supply and demand forecasts. Compared to their October report, USDA decreased 2009/10 U.S. production by 500,000 bales. Carry-in, domestic use, and export forecasts were unchanged, so the the bottom line was a 500,000 bale decrease in projected ending stocks for 2009/10 compared to the October report. This actually represents a small decrease in stocks/use over the 2008/09 marketing year.) Based on history, this represents a moderate supply/demand rationale for higher prices, and could explains some of the recent price rally. USDA's cash price forecast was shifted upwards three cents to a 52--60 cent range.