John Robinson Professor amp Extension EconomistCotton Marketing Department of Agricultural Economics Texas AampM University College Station Texas AAEA Grain Outlook Session August 14 2012 ID: 152503
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Slide1
Cotton Market Outlook
John Robinson Professor & Extension Economist-Cotton Marketing
Department of Agricultural Economics Texas A&M University College Station, Texas
AAEA Grain Outlook Session August 14, 2012Slide2
Discussion Points
Lower/Uncertain 2012 production/weak demandFund/Fed influencesDec’12 between 65-80 cents per lb.Dec’13 between 65-85 cents per lb.Slide3
Cotton
Fundamentals: The Return to NormalcyIncreasing U.S. ending stocks fits price pattern.
Historically high world ending stocks do too, but distorted by Chinese reserve stocks policy.Slide4
U.S. Cotton Stocks-to-Use Show Fundamental Rationale for Price Movements…
(…except in 2010/11
!)August 95 – August 2012Slide5
“A” Index
World Stocks-to-Use Show Similar Relationship to Price Movements
Monthly Forecasted World Stks-to-UseSlide6
Not likely repeatable confluence of mill behavior and market shocks
Induced regret, and other behaviors, among cotton producers and end usersHigher production by foreign growersReduced quantity demanded
(cancelled export sales, less usage, switching to polyester)Reflections on $2.00 CottonSlide7
High Prices Stimulated More Foreign Production
(Mil. Bales)Slide8
Production
ConsumptionHigh Prices Also Reduced Consumption:
Monthly Forecasts of World Cotton Production vs. Consumption, 2012/13 Crop YearSlide9
European sovereign debt
problemFinancial solutions imply austerity by banks and consumersImplications for semi-durable discretionary goods
Implies slow to negative economic growth in U.S. and EuropeHistorically this is associated with reduced demand for cottonWeak Demand OutlookSlide10
World Per Capita Cotton Use
Shaded bars represent periods of economic recession. Cotton consumption tends to drop during those periods due to fewer purchases of clothes, home furnishings, etc.
Source: USDA/ERS/WASDESlide11
Lingering Drought Effects Will Likely Lower 2012 U.S. Prod’n
Not enough for a supply shock…More like a little uncertainty premium into November.Slide12
Still, this drought map may be more influentialSlide13
Recent Cotton Price Behavior
Short of late breaking, major supply shock (Indian harvest or Chinese reserve stocks), I envision Dec’12 cotton futures to weaken back below 70 cents as the production uncertainty is resolved.
I do not expect outside influences to change this general picture.Slide14
Fund Sector was an early catalyst, but not the main force behind the 2010/11 rally.
In 2011/12, the Specs contributed to volatility, more in a semi-weekly risk on/off money flows.Changing expectations of economic growth = demand for commodities
Often following euro/$USD shiftsChanging expectations of QE3Fund/Fed InfluencesSlide15
January 3, 2006 Through
August 7, 2012
Source: Commitment of Traders Supplemental Report (Futures and Options)
CFTC Snapshot of Net Position of Index Funds and Hedge Funds (No. of Futures Contracts)Slide16
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 influentialProduction risk premiums starts to fadeOutlook for 2012Slide17
What About 2013?
December 2012 Settlement
Price
December 2013 Settlement
Price
January 3, 2012 – August 10, 2012Slide18
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.Slide19
Dec’13 Cotton Futures Could Follow 1995-98 Pattern
The years after ‘95 saw strong but progressively lower price rangesSlide20
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.
Contact me to receive it weekly by e-mail.
Click to view what’s new on this page.
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.