Reduced Acreage Threat Moves Cotton Prices Sideways
JON DEVINE
MEMPHIS, TENN.
Although cotton futures have moved higher in recent trading, values continue to essentially move sideways within a range between 58 and 62 cents/lb.
Several fundamental forces may be helping prices.
One of those is the threat of reduced acreage for the coming 2015/16 season.
This weekend, the National Cotton Council will be releasing the results of its survey of U.S. cotton producers’ planting intentions.
Expectations are that NCC findings will indicate a sharp reduction.
Several private forecasters have already suggested 15-20 percent decline and that U.S. plantings could drop below 10 million acres.
Global Cotton Acreage Likely to Decline
The reduction in U.S. acreage is expected to be mirrored in China, where policy reforms have concentrated government support to a single province (Xinjiang).
Outside of this province, acreage is forecast to fall rather dramatically.
Due to the reduction in Chinese acreage in the current crop year, China was surpassed by India as the world’s largest producer.
This was the first time in nearly thirty years that China did not produce more cotton than any other country.
India’s cotton acreage has proven stable in recent years, with only marginal reductions since the early 2000’s when seed technologies were adopted.
Correspondingly, India could be expected to experience a smaller decline in plantings than the U.S. and China and should solidify its position as the world’s largest producer next crop year.
World Consumption Could Rise
With world production likely to be lower next crop year, another factor that may help prices is consumption growth.
The decreases in cotton prices over the past year have made cotton more competitive relative to polyester and may help cotton regain some of the share lost in recent years.
Macroeconomic factors, like the decrease in oil and gasoline prices may also help stimulate demand growth by putting additional disposable income in consumers’ pockets around the world.
Production Shortfall Possible Next Crop Year
The combination of lower production and stronger consumption could result in the world growing less cotton than mills consume in 2015/16.
Normally, a production shortfall would mean upward pressure on prices.
However, with the actions of Chinese government over the past couple seasons, this is not a normal market.
Influence of Chinese Government Policy Remains
Following recent reforms, the Chinese government is no longer making purchases for its reserve system and has also signaled a sharp reduction in import quota.
With the government no longer buying for reserves, the direction of the distortion that the reserve system has presented to the market has reversed.
It is no longer a source of demand, and could be expected to evolve into an eventual source of supply whenever releases are made.
The decline in Chinese imports is a contributing factor to forecasts for increases in stocks outside of China.
Stocks outside China are generally available to the world market, and the combination of possible releases from reserves with continued weakness in Chinese imports suggests there could be an increase in available supplies even if there is a decrease world stocks.
The volume of available stocks has been a primary driver of price direction for the past several years and until Chinese reserves are drawn down, an understanding of how much cotton is available to weigh on prices should be important for understanding price direction. ∆
JON DEVINE: Senior Economist in the Corporate Strategy & Program Metrics Division, The Cotton Board