The cotton market managed to advance only marginally over the last couple of weeks, despite some dramatic developments in competing crops. Corn and soybeans both traded to all-time highs this week, with corn surpassing 8 dollars/bushel and soybeans trading north of 17 dollars/bushel after the biggest drought in 56 years continued to erode crop expectations.
Although wheat did not reach record levels just yet, it traded at its highest level since August 2008 at 9.36 dollars/bushel. Over 1300 counties in 29 states have already been declared natural disaster areas because of the drought and the count increases daily. Unfortunately there is no major break to this atmospheric high-pressure system in sight until at least the end of July.
The damage to the US corn crop is already of catastrophic proportions since the critical pollination period has passed and there is no longer any hope for a reversal of the situation. Last week the USDA estimated US corn yields at 146 bushels/acre, but sources we trust are placing their expectations at no more than 125-130 bushels/acre at this point.
Also, there will be a much larger than usual abandonment, which will further impact total output. The USDA estimated the crop at 13.0 billion bushels last week, but the way things look we may end up with no more than 11.0 billion bushels.
Soybeans still have a little more time to reverse their dire situation, but with every additional day of dryness and heat the door keeps closing a little more.
The cotton market has so far remained unimpressed by the rally in corn and soybeans. However, we don't believe that cotton can remain immune to this rise in food prices for too much longer.
The problem is that market participants typically subscribe to a static view when looking at the cotton situation, and what they see at the moment is a large global ending stocks number, which looks threatening to prices. What traders should be looking at instead is a more dynamic view of the balance sheet, which factors in the significant changes that will likely arise from the current situation.
Beginning with the Southern Hemisphere crops that are going to be planted later this year and continuing with the Northern Hemisphere crops next spring, we expect to see a significant drop in cotton acreage in origins like Brazil, Argentina, China, the United States and India.
Not only does the current ratio of 18-to-1 between Nov’13 soybeans and Dec’13 cotton make a convincing case for a shift out of cotton, but we also feel that Ag policy in populous countries like China and India will incentivize farmers to produce food rather than fiber next season.
Even without this looming acreage loss, we don’t perceive the current cotton situation quite as bearish as some other commentators. Although last week’s USDA report still has a rather bearish appearance due to its large 72.4 million bales ending stocks number, we need to dissect this report in greater detail to better understand the potential implications on price.
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