Today I’m continuing my series on the state of commodity markets for several Texas High Plains commodities (as long as the power stays on). Today we wrap up the portion on crops with the state of the cotton market. The long and short is that cotton is doing as well as the rest of the crop complex, price-wise. You can see a similar post for the wheat, corn, and sorghum markets in my last two posts. Next week I’ll wrap up this series with a post on the state of the cattle market.
Dates and Deadlines
1/27/2021 – 3/3/2021 Each Wednesday – Master Marketer Amarillo Online Program
2/18/2021 – 2/19/2021 – USDA’s 97th Agricultural Outlook Forum
2/19/2021 – Cattle on Feed
2/25/2021 – Annual Cold Storage
What I’m Reading
USDA’s action on RFID tags challenged in court – FeedStuffs
Cotton #2 Dec ’21 (CTZ21)
The exchanges are closed in observance of President’s Day. Last Friday (February 12th) December ’21 Cotton opened at $0.8345/lb. and closed at to $0.8389/lb. That price represents an increase in value of 23% since November 2nd and 34% since August 3rd. Cash receipts from cotton produced on the Texas High Plains are responsible for $335 million on average each year, making it the second largest cash crop in terms of value in the region.
Since the last post in this series a new WASDE was released, with bullish indicators for cotton. Exports were revised upward slightly, and with no other offsetting changes ending stocks declined 300,000 bales. The National Cotton Council’s Early Season Planting Intentions survey was also bullish. Planted cotton acres are forecast downward by 5.2% from the previous year, or approximately 11.5 million acres. Both signals combined to push Dec ’21 Cotton securely through the $0.80/lb. mark, likely making that the new resistance.
USDA did not raise the forecast season average farm price for cotton in the February WASDE. The price remained at $0.68/lb. Our Texas A&M AgriLife Extension budgets include an estimated harvest-time price of $0.70/lb.
U.S. Cotton Supply and Use (February 2021 WASDE)
Cotton Breakeven Prices
We often discuss the need to understand your own breakeven price to cover variable costs and total costs. The point at which average variable cost exceeds price is the shutdown point. When price rises above the shutdown point, it is within your financial interest to continue producing as you can dedicate some revenues towards fixed costs. The point at which average total cost exceeds price is the breakeven point. When price rises above the breakeven point, you have economic profits.
We have a budget for both irrigated and dryland cotton for District 1. You can find our Texas A&M AgriLife Extension cotton budgets, and all of our other budgets here. For sprinkler irrigated cotton, the breakeven price to cover variable costs is $0.39/lb. To cover total costs, the price of irrigated cotton sold must be $0.50/lb. across 1,500 lbs. of yield. For dryland Roundup Ready Flex cotton, the breakeven price to cover variable costs is $0.69/lb. To cover total costs, the price of dryland Roundup Ready Flex cotton sold must be $0.86/lb. across 400 lbs. of yield.
Remember that these budgets are an approximation and apply ‘in general’ to a diverse area, from Swisher to Dallam county. It is important to tailor these figures to your own operation.
These breakeven values provide a target to aim for when pricing cotton. Current prices of both are well above the breakeven prices to cover variable costs for most production models here on the Texas High Plains. In some cases current prices provide economic profits in a very real way. So, what should we all be doing in terms of pricing our crop?
After a lot of discussions with Mark Welch and John Robinson I think the real deciding factor this year will be how the acreage picture shakes out, both nationally and locally. The key to remember with cotton is quality grading. Though data is sparse, reports from the northern panhandle are of severe discounts based on quality at harvest-time. In a year when most prices are in the profitable range, the economic value of experience in producing one crop may be the deciding factor dividends when making your ultimate planting decision. The value of experience is real, and adds bushels or pounds, and therefore revenue, to your bottom line.
The goal is to price in a profitable range, hopefully even above the breakeven price to cover total costs. Economic profits are currently available in cotton if you lock in prices now. The seasonal pattern is similar to that of all summer crops, with prices rising into planting season, and declining the closer we get to harvest time. There is a slight deviation across the historic average with prices climbing slightly in August and September. If none of your 2021/22 crop is priced and your budgets currently indicate profitability now may be a good time to price a small percentage of your cotton crop.
Seasonal Pattern of ICE Dec Cotton Contracts Following La Nina Winters
Courtesy of John Robinson
Dr. John Robinson also covers the options market regularly, and recently pointed out the relationship of profits to the options market. As of last Friday, the board had Dec. ’21 Cotton priced at $0.83/lb. The price of a Put to lock in that price was $0.063/lb. If we account for somewhere between $0.04 to $0.05 basis on the southern High Plains that means we can realistically lock in a return of $0.72/lb. to $0.71/lb.
Keep an eye on your marketing plan and be ready through the acreage report to make marketing moves. Key dates that could induce short term, high impact market moves include: February 18th, the USDA Ag Outlook Forum; March 31st, the Prospective Plantings Report; May 12th, the May WASDE; June 30th, the Acreage Report.
Be sure to check out Dr. John Robinson’s weekly newsletter The Cotton Marketing Planner.