The role the December futures contract would normally play in determining 2001 cotton acreage is, instead, being played by the crop insurance program, according to Woods Eastland, president and chief executive officer at Staplcotn Cooperative in Greenwood, Miss.
“The market doesn't have to create more acres, because the crop insurance program is doing its job for it,” says Eastland.
He says the decision by producers to increase cotton acreage in 2001 due to the stimulus of the crop insurance program is one of the factors dramatically changing the supply and demand projections for U.S. cotton, which is affecting the futures market.
“The December contract from now to planting time will be in somewhat of a quandary,” he says. “We don't need as many acres as producers intend to plant, but the December contract can't discourage the acreage. The crop insurance program's 63-cents per pound price on a yield claim is generating the acreage increase. All December can do through planting time is stay low enough to discourage any other acres it can.”
Since December, he says, it has become apparent that projected domestic cotton consumption has “cratered” and export prospects have deteriorated. Because of these factors, “cotton traders are faced with more than adequate U.S. supplies during the transition months to new crop of August, September and October, and the prospects of at least a 19 million bale U.S. crop, if we have average yields, in 2001.
“The new reality is that even with a drastically reduced 2000 crop in the United States, off-take will be smaller than production, and ending stocks will grow,” Eastland says. What this means, he says, is that old crop cotton will, at some point, have to trade at a discount to new crop to reflect carrying costs.
It also means that, for the remainder of this year, the A Index will act as a ceiling for New York futures trading. “Because of our decreasing consumption, the job of New York is to keep us fully competitive, in the export market, aided hopefully by a Step 2 competitiveness certificate,” he says.
“If off-take does not falter, stocks outside the United States will continue to be brought down. This, coupled with the fact that several significant exporting countries produced less A Index quality cotton than normal, means that the 2000 crop A Index should slowly rise through the remainder of the winter and into the spring. This will leave room for New York to rally and still keep U.S. cotton competitive in the world, but I personally would be surprised if any old crop month could get into the upper 60s unless there's a squeeze in delivery.”
Eastland says he believes old crop prices will remain low, and could move lower until “unprotected cotton gets forced from weak hands.”
Then, he says, prices can rally only if the A Index rallies. “New York futures must remain at a two- to three-cents discount to the A to keep us from losing more export potential. This should keep futures prices from rising to the upper 60s. Eventually, old crop must trade at carry to new crop.”
The outlook for the 2001 cotton crop, according to Eastland, is moderately better. “We are projecting we'll increase U.S. carryover on July 31, 2002 to about five million bales if production and off-take projections are achieved. This means that the job of new crop futures months is to remain low enough relative to the A Index to make sure we miss no export opportunities.”
Eastland says December 2001 futures trading at a four- to five-cent discount to the A Index should provide a ceiling for the contract. Then, he says, if projected off-take materializes, the A Index should move significantly higher in the 2001-2002 marketing year, with the highest price level possible in the spring of 2001.
Factoring into Eastland's projections for the 2001-2002 marketing year, is the possibility that China could become a significant importer again with China “probably generating net imports of about 1.5 million bales” in the 2001-2002 season.
“This will be the first time China has been a significant importer since the 1997-98 season, and marks a huge change in world cotton flow. This should allow U.S. exports in 2000-2001 of about 8.5 million bales, raising projected off-take of U.S. cotton from this year's projected maximum of 17 million bales to 18 million or more. If achieved, this would be the largest U.S. off-take since the 1997-98 season,” he says.
Eastland's marketing advice to cotton growers is to do nothing, right now. “You don't know if there will be a POP this coming fall and winter, so just relax and see what happens. You don't want to hedge low and then fail to get a corresponding POP. Unless the rest of the world makes above average yields, or consumption falters, or both, new crop December should have little downside from here.”
He expects the December futures contract for cotton will stay four- to five-cents below the A Index, assuming the world crop is planted as anticipated and develops normally. “If the world projected off-take of 92 million bales also develops smoothly, then December can rally from here, but I doubt that December will get out of the 60s.”
If both domestic and world supply and demand develop as projected, Eastland says he believes his price projections will be “in the ballpark.” However, he says, “Literally anything can happen. Let's hope any surprises that develop turn out to be bullish for U.S. prices.”
“If there is a fly in the ointment, it probably will be world off-take not reaching projections. Most all of you have paid your December utility bill, and you know that a bigger piece of your disposable income is going to pay for energy. This is true all over the world.”