2015 COTTON MARKET OUTLOOK AND RISK MANAGEMENT DECISIONS

Transcription

1 2015 COTTON MARKET OUTLOOK AND RISK MANAGEMENT DECISIONS A A R O N S M I T H, P H. D. R O W C R O P E C O N O M I S T UNIVERSITY OF TENNESSEE EXTENSION AARON.SMITH@UTK.EDU

2 Supply and Demand Domestic balance sheet Global situation Farm Bill Deadlines General comments STAX and SCO Generic Base 2015 Crop Year Futures prices Profit and loss Random thoughts OVERVIEW

3 DOMESTIC SUPPLY AND DEMAND

4 Domestic Cotton Balance Sheet 2013/14 USDA Estimate 2014/15 USDA Projected January 2014/15 USDA Projected February 2010/ / /13 Supply Acres Planted (Million Acres) Acres Harvested (Million Acres) U.S. Average Yield (lbs/acre) Supply (Million Bales) Beg. Stocks Production Imports Total Supply Use (Million Bales) Domestic Exports Total Use U.S. Ending Stocks Foreign Stocks Chinese Stocks Price and Stocks to Use Ratio U.S. Avg. Season Price ($/lb) $0.82 $0.88 $0.725 $0.779 $0.59-$0.63 $0.59-$0.63 U.S. Stocks/Use 14% 22% 22% 17% 34% 29% Chinese Stocks/Use 23% 81% 139% 181% 173% 181%

5 Millions of Acres US UPLAND COTTON PLANTED AND HARVESTED ACREAGE % Decrease in planted acreage since 2001 Planted Harvested

6 Acres UPLAND COTTON PLANTED ACREAGE (MID-SOUTH/DELTA) 1,400,000 1,200,000 1,000, ,000 61% Decrease in planted acreage in Tennessee since , , , TENNESSEE MISSOURI ARKANSAS MISSISSIPPI LOUISIANA

7 Acres UPLAND COTTON PLANTED ACREAGE (SOUTHEAST) 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , ALABAMA FLORIDA GEORGIA NORTH CAROLINA SOUTH CAROLINA VIRGINIA

8 Acres UPLAND COTTON PLANTED ACREAGE (WEST AND SOUTHWEST) 450, , , , , , , ,000 50, ARIZONA CALIFORNIA KANSAS

9 Acres % of US Total UPLAND COTTON PLANTED ACREAGE (TEXAS) 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, TEXAS % of US Total Upland 70% 60% 50% 40% 30% 20% 10% 0%

10 US UPLAND COTTON PERCENT ABANDONMENT % 35% 30% 25% 20% 15% 10% 5% 0% 10 Yr Avg 17% % Abandonment

11 GLOBAL SITUATION

12 Billion Acres GLOBAL HARVESTED ACRES (CORN, SOYBEANS, WHEAT, RICE, AND COTTON) ~ 250 million acre increase in acreage for these 5 commodities from 2000 to 2014 Acres Harvested

13 Millions of Acres GLOBAL COTTON HARVESTED ACREAGE 90 World World

14 Millions of Acres COTTON HARVESTED ACRES BY COUNTRY China India US

15 Millions of Bales COTTON PRODUCTION BY COUNTRY India is estimated to have overtaken China in total cotton production China India United States

16 Millions of Bales GLOBAL COTTON PRODUCTION AND USE years production exceeding use 2014/15: 6.9 million bale surplus 2011/12: 23.4 million bale surplus Production Use

17 Millions of Bales ENDING COTTON STOCKS CHINA AND ROW Global stocks remains the key obstacle China ROW

18 US DOLLAR INDEX PAST 5 YEARS

19 CHINESE YUAN PER USD

20 Source: National Cotton Council

21 2014 FARM BILL C O T T ON AND RELATED DECISIONS

22 DEADLINES February 27 th Update Payment Yields and Reallocate or Retain Base Acres March 15 th Crop Insurance / SCO / STAX Sales Closing March 31 st Commodity Program Election ARC-C, ARC-I, or PLC; 5-Year locked in election Mid April Summer and 2015 Annual Enrolment in Commodity Programs

23 GENERAL COMMENTS Cotton is no longer a covered commodity Cotton base now generic base No reallocation 1 for 1 transition Dramatic change in cotton policy Cotton Transition Payments (fall 2014 sign up) Crop insurance / Stacked Income Protection (STAX) / Supplemental Coverage Option (SCO) can be purchased to provide protection Marketing loan remains an important marketing tool LDP/MLG could come into play in some circumstances with payment limit ($125,000) for programs

24 STACKED INCOME PROTECTION (STAX) County/area revenue policy available on all upland cotton acres planted (annual decision) Coverage is for a maximum band of 20%-- starting at a high of 90% (a 10% county/area loss) to 70% (a 30% county/area loss); not below 70% The available coverage options are 90-70, 90-75, 90-80, 90-85, 85-70, 85-75, 85-80, 80-70, 80-75, and Must choose a Protection Factor (PF) between 80 and 120%. The PF will adjust up or down any indemnity that would be received 80% premium subsidy May be purchased as a stand-alone policy or may be purchased in additional to the farm s underlying policy Indemnity paid when county/area revenue falls below 90% (or maximum selected) of the county/area guarantee

25 SUPPLEMENTAL COVERAGE OPTION (SCO) Available for the 2015 crop year in some counties Annual decision 65% premium subsidy Available for cotton and covered commodities Can not cover acres covered by STAX Crops on a farm enrolled in ARC are not eligible for SCO coverage Must have an underlying crop policy SCO follows the coverage of the underlying policy (YP, RP, RP-HPE) Covers from 86% to where the underlying crop insurance coverage ends SCO payments are triggered by losses in county average revenue or yield, and are not affected by whether you receive a payment from your underlying policy. So, it is possible for you to experience an individual loss but not receive an SCO payment or vice-versa

26 Acres 2013 BASE ACRES IN TENNESSEE 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , ,360,000 2,722,836 1,620, , , , , , ,260 More cotton base than any other single commodity. So regardless of whether you plant cotton, get informed on generic base. 270,000 65,582 30,000 3,772 3,023 1,472 1, Planted Base

27 GENERIC BASE ACRES Generic base acres are attributed to base acres when an acre of a covered commodity is planted If no covered commodities are planted there is no attribution of generic acres to base acres or payment acres

28 ATTRIBUTION OF GENERIC BASE ACRES If a single covered commodity is planted and planted acres exceed the generic base acres on the farm: The generic base acres are attributed to that covered commodity in an amount equal to the total number of generic base acres on the farm.

29 ATTRIBUTION OF GENERIC BASE ACRES If multiple covered commodities are planted and the total number of acres planted exceed the generic base acres: The generic base acres will be attributed to each of the covered commodities on the farm on a proportional basis

30 GENERIC BASE: ESTIMATED PAYMENTS PER BASE ACRE FOR CORN, SOYBEANS, AND WHEAT FROM ARC-C AND PLC FOR 2014 AND AVERAGE PAYMENTS FROM Crockett, Gibson, Hardeman, Haywood, Henderson, and Madison Counties CBO and FAPRI Price assumptions as at Feb 4 SCO Indemnities are not included in this analysis Available for purchase if PLC is chosen not available for ARC acres * These are estimates and do not constitute a recommendation*

31 LONG-TERM PRICE PROJECTIONS Commodity 2014/ / / / /19 Corn FAPRI $3.63 $3.81 $3.83 $3.84 $3.92 USDA $3.65 $3.68 $3.38 $3.47 $3.53 CBO $3.50 $3.50 $3.64 $3.75 $3.92 Soybeans FAPRI $10.02 $8.76 $9.11 $9.41 $9.79 USDA $10.20 $8.66 $9.00 $8.97 $9.19 CBO $10.00 $8.19 $8.67 $8.93 $9.32 Wheat FAPRI $6.13 $5.14 $5.19 $5.38 $5.63 USDA $6.10 $5.10 $4.38 $4.33 $4.56 CBO $6.00 $5.00 $4.74 $4.88 $5.09 Reference Prices: Soybeans $8.40/bu; Corn $3.70/bu; Wheat $5.50/bu

32 CORN CBO Prices FAPRI Prices County Time ARC-C PLC ARC-C PLC Crockett 2014 $58 $27 $57 $ Avg. $35 $26 $33 $19 Gibson 2014 $47 $26 $42 $ Avg. $30 $24 $27 $18 Hardeman 2014 $40 $24 $37 $ Avg. $27 $22 $24 $17 Haywood 2014 $58 $29 $56 $ Avg. $36 $27 $34 $20 Henderson 2014 $49 $26 $48 $ Avg. $30 $24 $28 $18 Madison 2014 $54 $29 $52 $ Avg. $34 $27 $32 $20

33 SOYBEANS CBO Prices FAPRI Prices County Time ARC-C PLC ARC-C PLC Crockett 2014 $18 $0 $18 $ Avg. $19 $8 $18 $5 Gibson 2014 $23 $0 $23 $ Avg. $21 $8 $19 $5 Hardeman 2014 $24 $0 $24 $ Avg. $21 $8 $20 $5 Haywood 2014 $23 $0 $23 $ Avg. $21 $8 $19 $5 Henderson 2014 $20 $0 $20 $ Avg. $22 $8 $20 $5 Madison 2014 $22 $0 $22 $ Avg. $21 $8 $20 $5

34 WHEAT CBO Prices FAPRI Prices County Time ARC-C PLC ARC-C PLC Crockett 2014 $25 $1 $24 $ Avg. $26 $28 $25 $18 Gibson 2014 $29 $1 $28 $ Avg. $27 $27 $26 $17 Hardeman 2014 $31 $2 $31 $ Avg. $27 $28 $26 $19 Haywood 2014 $24 $1 $23 $ Avg. $25 $26 $24 $17 Madison 2014 $25 $1 $24 $ Avg. $25 $28 $24 $18

35 2014 FARM BILL DECISIONS AND CONSIDERATIONS Commodity programs Avoid planting to select a program Let relative prices, input costs, fertility/weed/pest control etc. guide your planting decision Update yields For covered commodities(not cotton) choose the higher of the existing or updated payment yield on a farm-by-farm and commodity-by-commodity basis Select programs do not get defaulted If you get defaulted no payments in 2014 and PLC for remainder of the Farm Bill Be cognizant of deadlines and time constraints of FSA personnel Crop insurance Evaluate conventional crop insurance SCO versus STAX Do not purchase SCO on Farms/Acres that ARC is to be elected on

36 2015 CROP YEAR

37 MARCH 2015 COTTON FUTURES 21% decrease in price of the March 2015 contract in one year (Feb 11- Feb11)

38 DECEMBER 2015 COTTON FUTURES Since Oct 1: High: Low: Day Average as at Feb 11/

39 2015 Estimated Crop Returns Tennessee Cotton Soybeans Corn Milo Yield 864 lbs. 42 bu. 132 bu. 85 bu. Price (as of 2/10/15) $0.70 lb. $9.46 bu. $3.98 bu. $4.34 bu. Revenue $605 $397 $525 $369 Variable Expenses $459 $285 $412 $234 Returns Over Variable $146 $113 $113 $134 Land Costs (25% of Revenue- 25% crop insurance) $149 $97 $128 $91 Returns Over Variable and Land Costs -$3 $16 -$15 $43 Fixed Costs Depreciation & interest on $142 $61 $71 $69 machinery Returns Over Specified Costs -$145 -$45 -$86 -$26 Breakeven Price at Average Yield and Specified Cost $0.87 $10.54 $4.63 $4.64 Source: Chuck Danehower

40 COTTON PRICE/YIELD REQUIRED TO Breakeven Price For Selected Yield Yield (lb) Variable Cost ($/lb) Total Specified Cost ($/lb) 625 $0.90 $ $0.83 $ $0.77 $ $0.72 $ $0.68 $ $0.64 $ $0.61 $ $0.57 $0.72 1,025 $0.55 $0.69 1,075 $0.52 $0.65 1,125 $0.50 $0.62 Breakeven Yield for Selected Price Price Variable Cost Total Specified ($/lb) (lb) Cost (lb) $0.40 1,385 1,736 $0.45 1,232 1,545 $0.50 1,110 1,392 $0.55 1,010 1,267 $ ,162 $ ,073 $ $ $ $ $

41 RANDOM THOUGHTS Price likely to remain cent range Still need to move through large global stocks Gap between production and use has been decreasing Where will synthetic fiber prices go? Domestic planting will be down as will planting in Tennessee China remains a wild card on policy/supply/ demand Global economic growth will be important USD strength

42 QUESTIONS T HANK YOU