New crop cotton (Dec14 futures) prices have taken a sharp turn lower. Since tempting the 80-cent area, prices have dropped 3 cents and now stand at roughly 76 ½. There is little doubt that growers are looking for 80 cents or better before taking much action on new crop pricing. Whether that’s wise or not is debatable.
Growers seem willing to accept the risk for now in hopes of achieving that 80-cent mark (net 80 cents to them) later on. So, this decline over the past week or so is concerning.
The first cotton acreage estimate each year that most folks pay much attention to comes from the National Cotton Council. The council’s 2014 survey-based estimate will be reported at the annual meeting February 7-9. The next significant estimate will be USDA’s Prospective Plantings report on March 31. The first estimate of what has actually been planted will be the USDA Acreage report on June 30.
I say all that to say this—it honestly really doesn’t matter. Yes, the media will report the numbers and the market will react to the numbers—and both should for good reason. But let’s not fool ourselves. What’s more important is not what is planted but how much of that acreage will eventually be harvested (or not harvested) and the yield. This is even more the case this year.
We’ve just had three consecutive years of above-average acreage abandonment (36 percent, 24 percent and 26percent) due primarily to drought in Texas. Yield during this time, yield averaged 834 pounds per acre and ranged from 790 to 887 (826 this past year). Add to this, the fact that California now faces drought due to lack of snow fall.
U.S. cotton acreage will squarely depend on prices over the next few months. Not just the price of cotton but also the prices of competing crops like soybeans, corn and grain sorghum (and peanuts in some states, especially in the Southeast).
Right now, acreage is iffy. Since early December as cotton began to trend up to near the 80-cent mark, earlier pessimism gave way to the thought that cotton acreage could instead increase in 2014. A retreat back to the 76 to 77-cent area, if prices remain in that area, will damper that optimism and impact grower acreage decisions—but this will also depend on what prices for other crops do as we move closer to planting time.
The 2013 U.S. crop was 13.2 million bales (USDA, January 2014) based on 7.66 million acres harvested (26 percent abandonment of 10.41 million acres planted) and a yield of 826 pound per acre harvested.
So, while acreage planted is important and the market will react to those estimates and numbers as they are released, the market will be or should be even more sensitive to crop conditions as they impact harvested acres and yield potential. Even if acreage increases this year, the verdict is still out on production and there could be opportunities for price rallies.