1. Cotton Market Outlook John R.C. Robinson Professor and Extension Economist-Cotton Marketing Department of Agricultural Economics Texas AgriLife Extension Service Texas A&M University College Station, Texas Southern Outlook Conference Atlanta, GA September 23, 2009

2. ● Uncertain supplies and demand ● Summary of USDA’s September Cotton supply/demand numbers ● Cotton futures price forecast: –Dec09 between 55-65 cents –Dec10 up to the lower 70s? Discussion Points

3. Supply Uncertainty Texas started off very dry, and has lost most dryland production below I-10. The High Plains and Rolling Plains were spotty from a mix of dry/wet weather, and now are in a race for heat units, i.e., moisture is no longer the issue. Last week’s cold snap will probably foster low micronaire. If it’s widespread enough, it could also reduce boll weight and yield per acre in NASS Districts 1N and 1S.

4. Supply Uncertainty Elsewhere, moisture is the issue, in a bad way… 30% to 40% of Arkansas’ cotton looks like this…

5. ● USDA-NASS field survey for October report at the end of the week (Oct 1) ● While they can make some subjective adjustments, it will be months before the measurable effect is known. ● Likely grade impacts; perhaps some trimming of the U.S. prod’n number (How much?) Supply Uncertainties

6. ● Lingering effects of recession on consumer sentiment, purchases ● Cotton is tied more heavily to the general economy ● When will the U.S. and world economies resume growth? ● Meanwhile, USDA world consumption is 113 million bales, down from 121 million Demand Uncertainties

7. World Per Capita Cotton Use Shaded bars represent historical periods of economic recession. Cotton consumption tends to drop during those periods due to fewer purchases of clothes, home furnishings, etc.

8. Monthly Nearby Futures Settlement Price Vs. World Cotton Domestic Use

9. Supply/Demand Numbers For Old Crop and New Crop Cotton

10. Sept. production/supply number has now been muddled by recent weather events.

11. U.S. All Cotton Production, Percent Change from August vs. July U.S. All Cotton Percent ChangeU.S. All Cotton Percent Change Mktg. YearAugustJuly%Mktg. YearAugustJuly% 1998/9914.2613.92 -2.382004/0520.1823.2515.21 1999/0018.3016.97 -7.272005/0621.2923.8912.21 2000/0119.1617.19-10.282006/0720.4321.59 5.68 2001/0220.0020.30 1.502007/0817.3519.2110.72 2002/0318.4417.21 -6.672008/0913.7712.82 -6.90 2003/0417.1018.26 6.78 Million 480 Lb. Bales Calculation done by subtracting July minus August divided by August.

12. Supply/Demand Numbers For Old Crop and New Crop Cotton U.S. exports are influenced by overall demand uncertainty as well as likely exportable Surplus from India

13. U.S. Exports of All Cotton Export shipments this marketing year (blue line) started off below the needed weekly shipments (red line) to reach USDA’s forecasted target of 10.5 million bales of U.S. exports in 2009/10. Export shipments grew in August but dropped off since the recent rally in the futures market. At higher prices, India will also be selling some of it’s reserve stock, perhaps crowding out U.S. exports.

14. Supply/Demand Numbers For Old Crop and New Crop Cotton At this point the bottom line suggests a moderate reduction in ending stocks over the previous marketing year. This suggests Dec09 futures between 55-65 based on the supply and demand of cotton.

15. The 55-65 trading range is implied by the historical pattern of Dec. futures when ending stocks didn’t change much from year to year. (This involved data from a time when cotton prices were perhaps more influenced by the supply/demand of cotton.) Settlement Price (daily) Stable Carryover (’95, ’97, ’98, ’99) (monthly)

16. …However, if ending stocks are smaller than the previous year (i.e., if USDA revises forecasted production downward), expect level-slightly higher prices for harvest-time futures. Settlement Price (daily) S = Smaller Carryover (’89, ’90, ’93, ’94, ’02, ‘03) (monthly)

17. ● Maybe the historical, seasonal patterns are less relevant ● The cotton market also continues to be influenced by the supply and demand of investment money. On the other hand…

18. Net Positions of Index Funds and Hedge Funds vs. Nearby Futures Prices The fund sector has recently been behind the summer and September rallies in cotton prices, but not enough to break the mid-60s. Source: Commitment of Traders Supplemental Report (Futures and Options)

19. Technically Constrained between 57 & 65 This rally has been attributed to both speculative buying as well as well as the merchants being net long (more old crop hedge liquidation than new crop hedge selling).

20. World forecasted stocks-to-use was lowered in September report – potentially stable A-Index in the mid 60 cent range A-Index Monthly Forecasted World Stks-to-Use

21. Nearby Futures AWP “A” Index Loan Rate (52¢) “Loan Economics” may be in play for 2009/10 marketing year. “A” Index of World Prices (as of 9/25/09) 65.22 Adjustment to US location and grade -16.37 Adjusted World Price (AWP) 48.85 Loan Deficiency Payment (=Loan-AWP) 3.15 Expect smaller but positive LDP’s this year due to world prices (green line) averaging around 60 cents for the marketing year. Note: with new crop loan placements, merchant hedge selling may remove some of the current upside force on futures prices

22. 2010 Thoughts Dec10 has traded over 70 cents several times Reportedly there has been aggressive forward pricing of foreign growths at these levels. Suggests increase in cotton acres outside the U.S.

23. ● If Dec10 futures stay/return to 70 cents it may continue to buy foreign acres (same thing happened in Fall 2003 – Spring 2004). ● Suggests 2010 may not be a rosy “Wait til next year” kind of year. ● What may reinforce or diminish this outlook is how much foreign stocks are allowed to be drawn down. 2010 Thoughts

24. World Cotton Production and Consumption vs. Harvested Acres With economic recovery, 2010/11 world consumption may climb back towards 120M bales. The economic recovery scenario implies the need for 7 – 8 million more acres of cotton. Some of this is likely being bought by Dec10 futures above 70 cents.

25. World Cotton Harvested Acres vs. Nearby Futures Settlement Price Will 2009/10 look like 2003/04? Will Dec10 max out in lower 70s? ?

26. 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.edujrcr@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. September 25, 2009 Cost Expectations A marketing plan is a contingency plan of actions that a grower would take in various possible, but ultimately uncertain, market situations. Developing and implementing a marketing plan begins with an updated estimate of expected production costs. Without accurate farm-specific cost information, it is impossible to set meaningful pricing goals to cover your production costs. Texas cotton growers have a number of available sources of information and programs to help them figure their production costs as accurately and completely as possible. available sources of information and programs 2009/10 Fundamentals and Outlook 2009/10 U.S. Supply/Demand Projections. The September WASDE report made some small, offsetting adjustments to the U.S. numbers. Compared to their August numbers, USDA increased their forecasted production, first by raising the abandonment percentage from 14% to over 15%, and then raising the yield on the remaining harvested acres. This is in line with observations in West Texas of poor dryland crops and very good irrigated production prospects. The net effect was a couple hundred thousand more projected bales of production, which was basically carried over into the projected exports. After tinkering with the "unaccounted" number, the bottom line was no change in expected ending stocks for 2009/10. Hence, there was no supply/demand rationale for the market to react to this report, and it apparently did not. The projected range of U.S. farm price remained unchanged at 49-59 cents.September WASDE reportno supply/demand rationale