Cotton Market Outlook

1. Cotton Market Outlook John R.C. Robinson Professor and Extension Economist-Cotton Marketing Department of Agricultural Economics Texas AgriLife Extension Service Texas A&M University College Station, Texas

2. Discussion Points • 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

3. Supply Uncertainty Texas 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.

4. Demand Uncertainties • 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?

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

6. Supply/Demand Numbers For Old Crop and New Crop Cotton 2009 supply question is mostly resolved by this time with further tinkering likely

7. Net Positions ofIndex FundsandHedgeFundsvs.Nearby Futures Prices The fund sector has helped fuel the Fall rally in cotton prices, Source: Commitment of Traders Supplemental Report (Futures and Options)

8. Supply/Demand Numbers For Old Crop and New Crop Cotton The demand side still has lot of lingering uncertainty from the recession impact.

9. U.S. Exports of All Cotton 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.

10. Rising A-Index of World Prices in Response to Declining Stock Forecasts A-Index Monthly Forecasted World Stks-to-Use The resulting stocks-to-use, and the upward revision from last month are both bearish.

11. Thus, “Loan Economics” may be less of a factor in 2009/10 marketing year. Expect smaller LDP’s this year due to world prices (green line) averaging around 60 cents. “A” Index Nearby Futures Loan Rate (52¢) AWP A-Index Composition (all 1-3/32") MOT Midd             52.00 Memphis/Eastern Midd   52.25 Brazilian Midd          53.50 Pakistan Type 1503      54.50 Benin BELA             54.50 “A” Index of World Prices (as of 12/11/09) 75.07 Adjustment to US location and grade -16.37Adjusted World Price (AWP) 58.70 Loan Deficiency Payment (=Loan-AWP) 0.00

12. Looking Ahead to Next Year The 1st question is how many acres get planted in response 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.

13. When ending stocks don’t change much from year to year, the pattern of Dec. futures is to gently trend lower over the fall. We could follow this pattern if the numbers work out as projected in my previous table. Avg. Dec Futures in Stable Carryover Years(’95, ’97, ’98, ’99) Dec’10

14. In years when the ending stocks increase, the pattern of harvest-time prices is to fall harder in the summer and fall. This could happen with lots of supply and fuzzy demand Dec’10 futures Avg. Dec. Futures in Larger Carryover Years(’91, ’92, ’96, ’00, ’01, ‘04)

15. The last time we had high winter-time prices was in 03-04. It created a supply response that outweighed demand, leading to lower prices. Dec’10 Settlement Price Dec’04 Settlement Price

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

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