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The longer-term outlook for the cotton market will be considered supportive if there is a strong recovery in the world economy and we continue to see a loss of acres in the US. The short term situation is less supportive, as India’s crop looks larger than expected and the US crop may end up a little bigger than was expected earlier this summer when the market was bracing for the drought in Texas to cause very poor yields on non-irrigated acres. This did not happen, and there has been enough rain to cause crop conditions in Texas to stabilize. The USDA’s Crop Production and Supply/Demand reports for September, due to be released on September 11th (after this writing), should help set the near term direction. But if we see a significant price break into the harvest this year, we may be in a position to establish longer term position trades for cotton.
In the last newsletter, we reviewed the short term negative forces which led to a significant setback off of the August 13th highs. While cotton crop conditions are right on the USDA 10-year average, the yield estimate is still well under the trendline going back to 1994, while there is more and more talk of the advancement in seed technology and how this may boost yields further into the fall. If we see a period of less bullishness on the global economy, a firm US dollar or a setback in energy and other commodity markets, then commercial and speculative long liquidation selling could be a significant bearish force for cotton. If the global economic recovery is slow, we may see some adjustments lower in demand. China built a massive reserve of cotton and other commodities during the first half of the year, and expectations for continued strong demand from China in the months ahead are easing.
A break into harvest due to a short term economic situation may offer longer term investors a chance to position for an uptrending cotton market in 2010. World cotton ending stocks for the 2009/10 season are currently pegged at 181.4 days of supply, a 6-year low. US ending stocks from the August report were pegged at 5.6 million bales, a 5-year low but still more than 40% of usage. The run-up in cotton prices in 2008 came in conjunction with strong rallies for other competing crops, and the high price did not help spark a significant rise in production. If the world economy recovers in 2010 at the same time that any one of the world’s key producers ends up with planted area and/or weather problems, the global supplies could quickly see a significant decline. World ending stocks for the 2009/10 season are currently expected to fall to 57.46 million bales from 61.85 million in 2008/09 and 63.25 million bales in 2007/08.
Planted acreage in the US is already down to its lowest level since 1983, and the factors which could push plantings lower for 2010 still appear to be in place. Producers in the southern US are still seeing much better returns for soybeans and grains than they do for cotton. The World Trade Organization’s recent ruling in favor of Brazil, in which they charged that US government subsidies to producers are too high, could be a factor that leads to less lucrative government program for cotton producers in the future and which may add to the reasons for cotton producers to shift to other crops. If world production falls at the same time that the world economy picks up steam, cotton prices could see a bullish trend ahead.
