Predicting where cotton prices will go in a volatile economic environment is challenging market analysts. But one thing for sure is that the 2022 cotton market will run through Texas.
According to Texas A&M AgriLife Extension economist John Robinson, a number of issues have impacted and impacted cotton prices.
Post-pandemic purchases, dollar strength, rising costs of fuel, food and other consumer goods could affect the cotton market. So does the Texas area and the weather of the season.
In a recent market update webinar featuring extension economist Mark Welch dealing with grains, Robinson looks at the basics behind the recent rise in cotton prices.
See, NCC’s Gary Adams talks about cotton planting, farm bill, export
“Overcoming the epidemic, we have seen strong upward demand in the supply chain for cotton use and retail sales all the way up and down,” he said. “The [post pandemic] The recovery was intense and defined as a boom, reflected in the cotton market.
That recovery, he said, has helped lift prices over the past 18 months.
“Also, people thought we were facing a drought a year ago – until the rains started last May and June 2021.”
The drought speculations fueled a lot of speculative buying. “A lot of bets were made that we would have a short crop, a short supply and a high price in 2021. That’s what put the market in the first place – the pandemic recovery and speculative buying after increased demand.
A bunch of business
More recently, Robinson said, “A whole bunch of cotton trades have put cotton prices at $ 1.30, $ 1.40 and $ 1.50. It’s still hanging in there.
“A whole bunch of textile mills bought cotton from the 2021 crop. And when they take delivery, they buy back their hedges. Because so many of them traded this way, they created what they call it Mill stabilizationBuying back hedges.
Another factor is the value of the dollar, which is called the Robinson Headwind. “When the dollar gets stronger, when the economy is strengthening (the boom phase), the dollar goes up.
“When the dollar goes up, it is a headwind for commodity prices, especially the commodities we export – cotton, wheat and soybeans to some extent (even some corn).
“When the dollar is strengthened, textile mills in China will shift money into Brazilian currency and buy Brazilian cotton cheaper than US cotton. All things being equal.”
Customer demand plays a role. Robinson said cotton consumption will decrease in the recession. “Cotton, more than cereals, is a product of discretion. When the time is tough, we can buy cheap cuts of meat or eat peanut butter sandwiches, but we are still going to eat them. And we’re going to put gasoline in our cars and trucks. But we don’t buy clothes during tough times.
Robinson said the market is still moving, “Mill Fixation Dynamic, influenced by the remainder of last year. Mill stabilization has led to higher movement from $ 1.10 to $ 1.40 to $ 1.50.”
“It will fade when the July deal comes out,” he said. “The old crop market year is over and that ’21 crop export sale has been finalized. They will buy back the hedges, which may result in some last-minute fireworks in June. We may get over $ 1.50, but when this is done, it is over. The new crop will not have much effect on the future.
He said the future of the new crop was supported by the impact of the drought – one small crop, a lot of abandonment prospects and we had 16-million, 15-million or 14.5-million crops.
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Robinson said new crop prices have risen, with drought expected. “However, I think a lot of cotton is planted.”
Drought is favorable for cotton
Drought conditions are favorable for cotton rather than grain, he said. “Cultivators prefer cotton because it is better to have a cotton crop in dry conditions than a grain crop. If it does not, it is better to have an insured cotton crop failure than the grain crop failure they insured.
The critical factor is what Texas cotton farmers plant and harvest.
“A whole bunch of Texas growers are putting cotton seed in the ground, buying expensive insurance on it and waiting to see what happens,” Robinson said.
He noted that the May rains have complicated the picture in most parts of the southwest cotton production area, “from the point of view of analysts. This is a big question mark in terms of supply and demand for cotton.
He said the picture of the planted acres will attract more attention in July and August and later in the fall. “I bet it’s probably between 12 million and 12.5 million acres. The real question is what will be harvested. Right now, the USDA is predicting that we will abandon 25%. That might leave 30%. A lot of smart people think it’s probably 30%, but it remains to be seen.” .
“Last year was a good example of, ‘We’re in a drought, we’re going to lose these acres.’
Production risk and drought are the driving forces, especially in Texas. “It already is,” Robinson said. “There is a lot of acreage in the coastal bend behind the insurance adjuster window. Some of it has already been nullified. With this last rain, a little cotton may emerge, but they have already lost production due to the drought.
“There is a drought problem in the Southern Rolling Plains, Northern Rolling Plains, Panhandle and South Plains.”
Conditions in Texas’ largest manufacturing areas could turn entire US production and the entire US supply up or down by 1.5 million bales, he said.
Adding to the uncertainty is the carryover, which is tight, Robinson said, with the USDA estimating 2.9 million bales. “It’s historically very tight and supports cotton prices above $ 1.10, probably until harvest. If we cut 1 million, 1.5 million or 2 million from this number, the end stocks will tighten.
“If it’s too tight or too, too tight, the prices are in the $ 1.10 to $ 1.30 range. We need to see how high it goes.”
How should growers manage in this market environment? “This level of production risk is difficult,” Robinson said. “It is difficult to forward a contract to capture those prices and the obligation to deliver bales in an uncertain manufacturing environment.”
He said seasonal pools can be meaningful, especially in dryland areas. “Hedging is expensive but gives you the opportunity to buy $ 1.10 or $ 1.20 put options.”
Meanwhile, the cotton market tends to make sense of uncertainty. “It’s sitting there making a good guess as to what’s possible, but the uncertainties keep prices high until it’s clear how much or how little we actually produced,” Robinson said.
And what Texas produces is crucial.
For more information on the cotton markets, check out Robinson’s newsletter here http://agrilife.org/cottonmarketing/.