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Demand is a Driving Force in Current Cotton Market

USDA Projects 21 Percent Increase For 2017 U.S. Cotton Acreage

By John Johnson

The cotton market has been demand-driven for several weeks, and clear evidence is present in the level of U.S. export sales. Weekly export sales volume reported by USDA has been outstanding, leading the department to raise its estimate for the 2016-17 marketing year that ends on July 31.

In its March World Agricultural Supply and Demand Estimates (WASDE) report, USDA increased its estimate for U.S. exports by 500,000 bales to 13.20 million compared to the previous month’s report. However, through March 30, export commitments stood at 13.40 million statistical bales, and export shipments totaled 8.30 million bales. The demand for 2016-crop as well as 2017-crop cotton, thus far, has been supported by U.S. cotton’s price competitiveness with other growths around the world.

Additional evidence of strong international demand is the number of buying countries listed in USDA’s weekly reports. Another factor is demand for U.S. cotton is much less dependent on China than in previous years, yet China has been among the buyers listed each week. A supply shortfall versus estimated consumption is part of the reason.

According to recent estimates, the shortfall is expected to be 13.75 million bales. Much of that, approximately 9.25 million bales, will be covered by sales from China’s massive reserve stocks and the balance by imports of 4.50 million bales.

With most of the 2016 U.S. crop already sold, market attention has turned to 2017. Traders and analysts anxiously awaited USDA’s Prospective Plantings report released March 31 which estimated 12.23 million acres will be planted to cotton this year, up 21 percent from 2016 due to lower prices for other commodities. Texas producers are expected to plant 6.90 million acres compared to 5.65 million a year ago. Oklahoma cotton acreage is expected to total 470,000, up 165,000 acres, and Kansas producers are expected to plant 56,000 acres of cotton compared to 32,000 in 2016.

Analysts, however, are quick to point out that planted acres and harvested acres are not the same. In 2016, abandoned acres were unusually low, and per-acre yields were higher than expected. The International Cotton Advisory Committee foresees 2017 abandonment and yields to be closer to the five-year average. Therefore, the committee estimates 2017 U.S. cotton production will be near the same level as the 2016 crop.

Cotton futures prices leading up to the latest WASDE report were mostly range-bound but slowly creeping higher at times. The December contract, meanwhile, remained remarkably steady. One market factor repeatedly mentioned by analysts is the level of unfixed on-call sales.

Mills in the last half of March made good progress setting the price for cotton they previously had committed to purchase based on the May futures contract; however, the volume of cotton still to be priced remained very high. The price inversion from the July futures contract to the December contract could make it difficult for mills to continue deferring their price decisions beyond July which could increase the potential for the market to move higher.