A few customers have recently asked me whether or not the cotton market is selling off as a result of the recent sell-off in the grain markets. Many of the fundamentals that we watch in the grain markets also apply to the cotton market including exports, acreage planted, and weather patterns.
The cotton market has made an impressive rally since the lows made in mid-May. We came into the season with large domestic supplies in conjunction with a weak export market this year. According to the Cotton Outlook Balance Sheet, the USDA opening stocks were 8,628 million bales (MB) in 2006/2007 versus 9,101 MB for the 2007/2008 crop year. In conjunction, China's opening stocks were 3,704 MB in 2006/2007 versus 3,176 MB for the 2007/2008 crop year.
Historically, the U.S. has been the second largest cotton producer globally-behind China and ahead of India. However, we are the largest exporter onto the world market. We have seen a decline in exports this year as a result of increased competition on the world market from India. The India Farm Minister stated that the country's 2006/2007 cotton crop is 22.7 MB versus 18.5 MB the previous year. As we approach the end of the 2006/2007 marketing year August 1st, the USDA expected a much stronger export market. Marketing demand is currently running approximately 22% below expectations for the year.
The price pressure in cotton, as planting took place, discouraged many farmers from planting cotton this year as they vied for more profitable crops (such as corn). According to the June 29th USDA quarterly report, there is 11.058 million acres planted versus 15.274 million acres last year. This is a decline of 4.216 million acres (27%) from last year. This does not necessarily mean that the final harvested crop will be 27% less than this year, due to better seed varieties. According to Judith Ganes, the best case scenario would yield an 18.299 MB cotton crop versus the USDA projection of 18.482 MB currently. It is more likely that the final crop will be between 17 - 18 MB as a result of dryness in the southeastern part of the U.S. early on. With a weak dollar and higher potential demand in China, the exports to China are expected to increase to 3,645 MB versus 2,547 MB in the 2006/2007 marketing year. The USDA is expecting a decline in ending stocks of 1,112 MB in 2007/2008 from the 2006/2007 year. With an increased probability of a smaller crop, the decline in ending stocks will likely continue to fall.
The weather markets have been pressuring the grains and cotton markets this week as good rainfall has crossed over much of the key producing areas. Prior to this round of showers, the Palmer Drought Index posted on the Weather Channel indicated that a large part of the southeastern U.S. has been moderately to excessively dry. In the U.S., Texas is the largest producer of cotton-followed by Georgia ranking second. Much of the Texas growing area has been plagued with the opposite problem of excessive wetness. One key factor to note is that as the prices fall for corn and soybeans relative to cotton, it may encourage producers to look at planting more cotton again next year. The acreage battle will likely be a hot topic for the next few years as demand continues to drive the corn market.
Technically, the cotton market broke the uptrending channel last Thursday. However, the commitment of traders report indicates that the market is overbought. Look for a pull back to key support areas for a buying opportunity.
Key Support: 6349; 6222; 6019
Key Resistance: 6880
