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Cotton Market Outlook Cotton Market Outlook

Cotton Market Outlook - PowerPoint Presentation

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Cotton Market Outlook - PPT Presentation

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

2012 cotton production stocks cotton 2012 stocks production million price august demand world texas consumption bale futures cents marketing

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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.