Cotton prices began plummeting on May 10, the day the USDA May supply/demand numbers were released.

Prices (Dec12 futures) have dropped 18 percent — from just over 83 cents on May 9 — to just under 69 cents on Wednesday of last week.

Prices have thus far attempted to stop the bleeding twice. The first attempt around 75 cents was unsuccessful. The second attempt is around 70 cents — where we are right now. I shudder to think where prices are headed if the bleeding doesn’t stop soon.

Factors. I’ve talked to no one that saw this coming — let me be more clear, I didn’t and no one else saw it coming quite this soon or of this magnitude.

But this doesn’t make growers feel any better so there’s little to be gained by dwelling on the past. If we are to understand the near-term and longer-term outlook, however, we have to be clear on how we got here and what it will take to pull us out of this ditch.

1.) World stocks: 2011-12 ending world stocks have been building for months. Note that prices were already in a downtrend since February.

USDA monthly supply/demand revisions for previous years and carried forward, increased estimated world stocks (there was more cotton out there than previously thought). USDA’s May report contained the first projections for the 2012-13 crop marketing year. This report added another 7 million bales to projected World stocks by this time next year.

2.) Demand: Supply doesn’t operate in a vacuum. What’s important is supply and demand in relation to each other. Demand has weakened. World demand for the 2011 crop year was once estimated at 120 million bales. That number is now less than 107 million.

Weak demand combined with growing stock projections made it increasingly difficult to hold prices where we’d all like to see them. Demand has been rumored to be “improving” and there have been occasional good export reports but apparently too little too late has actually materialized.

Demand for the 2012 crop year is expected to improve to 110 million bales, but production is expected to still out-strip that by 7 million bales — thus the projected increase in 2012-13 stocks.

3.) China: It is not exactly earth-shattering news that China has been buying cotton to increase their stocks (reserves). This has been going on for months — and was once viewed as a positive from a demand/export (buying) perspective.

Chinese stocks are expected to increase from only 11.6 million bales at the start of the 2011 crop year to a projected 28 million bales by the end of the 2012 crop year. This is due to the huge increase in imports, but also expected decline in 2012 crop year demand. This level of stocks (38 percent of the world) is a large and significant number.

4.) U.S. acreage and weather/drought potential: Regardless of otherwise increasingly bearish supply/demand fundamentals, prices were attempting to remain afloat at least in-part based on the fact that U.S. acreage for 2012 would be down from 2011 and there was continued potential for another drought in 2012.