Today, we check in on the cotton market for the fall. What are the fundamentals underpinning to $1.08/lb. cotton? What is the profitability picture with $1+ cotton?
Dates and Deadlines
11/3, 11/30/2021 – Virtual wheat and soil field days
10/24 – 10/26/2021 – TCFA Annual Convention
10/27/2021 – QuickBooks Pro Training, Stephenville
10/27/2021 – Texas beef, brush virtual seminar
11/1/2021 – Lunch with a Specialist; Briscoe County
11/9/2021 – WASDE
What We’re Reading
Expect higher prices, fewer options on Thanksgiving turkeys – AgriLife Today
Battle Ground to Breaking Ground program now taking applications – AgriLife Today
Cattle contract library legislation advances – Farm Progress
What’s behind USDA’s record yield predictions? – Farm Futures
2021 Inputs: JA comedy of errors? – Farm Futures
Powell Says Supply-Side Constraints Have Worsened, Creating More Inflation Risk – Wall Street Journal
Cotton Supply and Demand
The October WASDE lowered estimates of cotton production and consequently lowered ending stocks to 3.2 million bales, though production is forecast 23% greater than 2020. The U.S. cotton crop is in good condition, though production is slightly behind the previous five-year average. As of last week 64% of the U.S. cotton crop rated good-excellent. Harvest is just over 20% complete, slightly behind the 5-year average. Harvest is ahead of schedule in Texas. Somewhere in the neighborhood of 35% of the Texas crop has been harvested against a five-year average of about 85% for mid-October. As of last week crop conditions are at their highest levels since 2017; 60% of the Texas corn crop is rated Good to Excellent. Harvest is also well under way with just under 90% of the crop harvested.
Crop Progress and Condition: United States Cotton, 2021
Crop Progress and Condition: Texas Cotton, 2021
If realized, forecast cotton production levels would be the second lowest in the last five years. Though cotton production is up in two of four cotton producing regions, reduced yield in Texas over the last month led to the reduced production forecast. The projection for total harvested acreage is up to 9.9 million acres from 8.3 million last year, an increase of about 19%.
U.S. regional upland cotton production
While production estimates are falling, demand remains stable at 18 million bales, in line with the previous five year average. Once again exports lead U.S. cotton demand, responsible for about 86% of total demand. Overall, global cotton stocks are forecast to decline.
U.S. Cotton use and exports, 2017/18 – Oct. 2021/22 WASDE Projection
Cotton Price
The October WASDE projected a season-average farm price for upland cotton at a record price of 90 cents per pound. For reference, last year’s final nationwide price estimate was 66.3 cents per pound. That record high has been borne out in the futures market as speculative buying drove prices to their highest levels since 2011, when the Continuous A-Index blew past $2.00/lb. As of writing, the CME DEC Cotton contract for this year is sitting at $1.0791/lb. Over the previous five years, the average price for DEC Cotton as of mid-October was $0.70/lb.
CME Cotton DEC ’21 (10/25/2021)
Last week’s Commitment of Traders report suggests commercial interests (merchants, mill, co-ops, and farmers) are net short 117 thousand contracts, hedging against lower prices in the future. Simultaneously, speculative money remains long on perceived bullish fundamentals. As John Robinson pointed out in his Cotton Marketing Planner Newsletter last week, Chinese cotton futures prices remain above $1.50/lb., making U.S. cotton an attractive buy and in high demand for exports.
This price rally is speculatively driven and, as with grain sorghum, it seems largely driven by influences out of China. I’m not comfortable calling myself a marketer yet, but it seems like this price is worth securing if you haven’t already taken advantage of the opportunity. There is always room for price to go up, but as you’ll see in the next section, profits are locked in and a well placed put option will still yield profit. Be sure to check Dr. Robinon’s Cotton Marketing Planner Newsletter for more frequent market intel on cotton.
Commitment Of Traders Positions: October 19, 2021
As of Friday, West Texas spot price quotes were $1.0501/lb. With the possibility of this rally being short lived its worth estimating profit for the year with a few different prices. Let’s look at a range of prices; a low of $0.85/lb., a middle price of $0.95/lb., and high price of $1.05/lb., and keep input prices as they were for this crop year. For irrigated cotton (1,500 lb./acre), returns over fixed costs per acre for the crop currently in harvest at those prices would be $529, $679, and $828, respectively. For non-irrigated cotton (400 lb./acre), returns over fixed costs per acre for the crop currently in harvest at those prices would be ($2.03), $38, and $78, respectively You can estimate the expected returns for your own crop with your own input prices and sales using our Crop Profitability Analyzer.