Cotton Market Outlook
AAEA Grain Outlook Session
August 14, 2012
John Robinson
Professor & Extension Economist-Cotton Marketing
Department of Agricultural Economics
Texas A&M University
College Station, Texas
Discussion Points
● Lower/Uncertain 2012
production/weak demand
● Fund/Fed influences
● Dec’12 between 65-80 cents per lb.
● Dec’13 between 65-85 cents per lb.
Cotton Fundamentals:
The Return to Normalcy
Increasing U.S.
ending stocks
fits price
pattern.
Historically high
world ending
stocks do too,
but distorted by
Chinese reserve
stocks policy.
Cents/Lb. and Percentage
220
200
180
160
140
120
100
80
60
40
20
0
Dec-95
May-96
Oct-96
Mar-97
Aug-97
Jan-98
Jun-98
Nov-98
Apr-99
Sep-99
Feb-00
Jul-00
Dec-00
May-01
Oct-01
Mar-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Sep-04
Feb-05
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Mar-12
Aug-12
U.S. Cotton Stocks-to-Use Show Fundamental
Rationale for Price Movements…
(…except in 2010/11!)
Marketing Year
U.S. Stks/Use
August 95 – August 2012
Nearby Futures
Ratio
120
110
100
90
80
70
60
50
40
30
20
10
0
Aug-99
Jan-00
Aug-00
Jan-01
Aug-01
Jan-02
Aug-02
Jan-03
Aug-03
Jan-04
Aug-04
Jan-05
Aug-05
Jan-06
Aug-06
Jan-07
Aug-07
Jan-08
Aug-08
Jan-09
Aug-09
Jan-10
Aug-10
Jan-11
Aug-11
Jan-12
Aug-12
“A” Index
Monthly Forecasted World Stks-to-Use
240
220
200
180
160
140
120
100
80
60
40
20
0
Price
World Stocks-to-Use Show Similar
Relationship to Price Movements
Reflections on $2.00 Cotton
● Not likely repeatable confluence of
mill behavior and market shocks
● Induced regret, and other
behaviors, among cotton producers
and end users
● Higher production by foreign
growers
● Reduced quantity demanded
(cancelled export sales, less usage,
switching to polyester)
High Prices Stimulated More
Foreign Production (Mil. Bales)
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
05/06
Central Asia
06/07
07/08
African French Zone
08/09
09/10
Other S. Hemisphere
10/11
Australia
11/12
Brazil
India
12/13
China
High Prices Also Reduced Consumption:
125.00
123.00
121.00
119.00
117.00
115.00
113.00
111.00
109.00
107.00
105.00
Production
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
Consumption
May-11
Million 480 Lb. Bales
Monthly Forecasts of World Cotton Production
vs. Consumption, 2012/13 Crop Year
Weak Demand Outlook
● European sovereign debt problem


Financial solutions imply austerity by banks and consumers
Implications for semi-durable discretionary goods
● Implies slow to negative economic
growth in U.S. and Europe
● Historically this is associated with
reduced demand for cotton
10.00
6.00
1970/1971
1971/1972
1972/1973
1973/1974
1974/1975
1975/1976
1976/1977
1977/1978
1978/1979
1979/1980
1980/1981
1981/1982
1982/1983
1983/1984
1984/1985
1985/1986
1986/1987
1987/1988
1988/1989
1989/1990
1990/1991
1991/1992
1992/1993
1993/1994
1994/1995
1995/1996
1996/1997
1997/1998
1998/1999
1999/2000
2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
Lbs./Population
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.
9.00
8.00
7.00
Source: USDA/ERS/WASDE
Lingering Drought Effects Will
Likely Lower 2012 U.S. Prod’n
Not enough for
a supply
shock…
More like a little
uncertainty
premium into
November.
Still, this
drought map
may be more
influential
Recent Cotton Price Behavior
Short of late breaking, major
supply shock (Indian harvest or
Chinese reserve stocks), I envision
Dec’12 cotton futures to weaken
back below 70 cents as the
production uncertainty is resolved.
I do not expect
outside influences to
change this general
picture.
Fund/Fed Influences
● Fund Sector was an early catalyst,
but not the main force behind the
2010/11 rally.
● In 2011/12, the Specs contributed to
volatility, more in a semi-weekly risk
on/off money flows.
1. Changing expectations of economic growth
= demand for commodities
2. Often following euro/$USD shifts
3. Changing expectations of QE3
-40,000
2/7/06
3/21/06
5/2/06
6/13/06
7/25/06
9/5/06
10/17/06
11/28/06
1/9/07
2/20/07
4/3/07
5/15/07
6/26/07
8/7/07
9/18/07
10/30/07
12/11/07
1/22/08
3/4/08
4/15/08
5/27/08
7/8/08
8/19/08
9/30/08
11/11/08
12/22/08
2/3/09
3/17/09
4/28/09
6/9/09
7/21/09
9/1/09
10/13/09
11/24/09
1/5/10
2/16/10
3/30/10
5/11/10
6/22/10
8/3/10
9/14/10
10/26/10
12/7/10
1/18/11
3/1/11
4/12/11
5/24/11
7/5/11
8/16/11
9/27/11
11/8/11
12/20/11
1/31/12
3/13/12
4/24/12
6/5/12
7/17/12
No. of Contracts
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
-20,000
Weekly
Index Funds
Hedge Funds
Source: Commitment of Traders Supplemental Report (Futures and Options)
Nearby Futures
220
200
180
160
140
120
100
80
60
40
20
Cents/Lb.
CFTC Snapshot of Net Position of Index Funds
and Hedge Funds (No. of Futures Contracts)
January 3, 2006 Through August 7, 2012
Outlook for 2012
● No major Spec influence short of
meltdown in $USD
● The demand picture will remain
weak from reduced consumption
and poor/slow economic growth.
● For a while, this will be balanced by
uncertain production.
– September WASDE report influential
– Production risk premiums starts to fade
What About 2013?
100
December 2013
Settlement Price
Cents/Lb.
90
80
70
December 2012
Settlement Price
60
J
F
M
A
M
J
January 3, 2012 – August 10, 2012
J
A
What About 2013?
● Consider 2007 when the 4,900,000 planted acres of
Texas cotton was 23% less than in 2006 – and pretty
much for the same reasons. So let’s assume that U.S.
planted acres of all cotton decline to 9.5 million.
● With avg. abandonment and yields, could still see 15M
bales of production. Adding in likely 2012/13
carryover gives a 20 million bale supply. If we export
12 million and use 3.4 million, that gives a roughly
similar ending stocks for 2013/14 and 2012/13.
– Little fundamental rationale for significantly higher cotton prices
than this year’s range of the Dec ‘12 contract.
● Assumes no demand or policy shock in 2013/14.
Chinese cotton stocks, polyester over-capacity, and
cotton demand are the big wildcards.
Cents/Lb.
High
Low
80.0
84.1
70.7
65.4
53.5
45.9
39.1
51.7
68.4
62.8
96.0
106.2
98.5
142.0
151.2
The years after ‘95
saw strong but
progressively
lower price
ranges
95.5
82.7
69.5
65.5
67.6
68.5
73.9
46.3
46.8
93.4
84.3
77.8
64.1
68.9
76.1
76.5
77.0
70.7
71.1
79.8
70.0
59.3
43.4
43.8
35.0
28.5
53.9
48.1
60.2
66.4
70.3
67.8
59.5
54.6
51.1
56.2
62.9
50.9
48.8
34.4
30.2
73.0
180
160
140
120
100
80
60
40
20
0
57.5
Dec’13 Cotton Futures Could
Follow 1995-98 Pattern
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
The Cotton Marketing Planner
http://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.
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August 7, 2012
Recent Price Patterns and Short-Term Influences
Recent Price Pattern. The week ending Friday August 10 saw the Dec'12 cotton futures stair-step up from 74 to 77 cents per pound before declining on Friday to settle
at 73.02 cents per pound on a bearish looking WASDE report (see below). Corn prices hit record highs Thursday and early Friday, but this did not carry into other ag
markets. In terms of the general economy, there were mixed indicators this week, and the European financial crisis still appeared to affect currency, credit, equity, and
commodity markets. Click here for a discussion of longer term fundamental influences on 2012/13 cotton futures.
2012/13 Fundamentals and Outlook
The 2012/13 cotton supply/demand picture was adjusted bearishly by USDA's August WASDE report with increases in on the supply side for both the U.S. and world,
compared to the July numbers. The August report raised projected beginning stocks in in China by almost two million bales, outweighing small reductions to other
countries' beginning stocks. Other Chinese adjustments in included half million bale adjustments to production (higher), imports (lower), and mill use (lower), for a net
2.38 million bale increase in projected Chinese ending stocks. The other notable foreign adjustments included a half million bale decrease in Indian production and a
quarter million bale increase in Pakistani mill use. The bottom line was a 2.28 million bale net increase in projected 2012/13 world ending stocks to a record 74.67
million bales. This continues from last year the pattern of excess world production over consumption adding to ending stocks.