Market Outlook David Reinbott Agriculture Business Specialist P.O. Box 187 Benton, MO 63736 (573) 545-3516 http://extension.missouri.edu/scott/agriculture.aspx reinbottd@missouri.edu
Cotton Fundamentals and Current Outlook John Robinson Professor and Extension Economist-Cotton Marketing http://agrilife.org/cottonmarketing/ Department of Agricultural Economics Texas A&M AgriLife Extension Service Texas A&M University College Station, Texas
A Tale of Two Outlooks I. USDA has projected bearishly increasing U.S. cotton ending stocks for 12 months II. Foreign mills responded to low price outlook by record on-call purchases/export sales III. Hedge funds interpreted this as bullish new demand and bought the market higher IV. The influence of mill fixations and hedge fund buying may only last through June V. Long term fundamental picture is still for bearish increase in U.S. ending stocks
USDA Projections 2016/17 Est. 2017/18 Proj. Area Million Acres Planted 10.07 12.61 Harvested 9.51 11.35 Pounds Yield/Harvested Acre 867 899 Million 480 Pound Bales Beginning Stocks 3.80 2.75 Production 17.17 21.26 Imports 0.01 0.01 Supply, Total 20.98 24.02 Domestic Use 3.25 3.35 Exports, Total 14.92 14.80 Use, Total 18.17 18.15 Unaccounted 0.06 0.17 Ending Stocks 2.75 5.70 January 12, 2018 USDA Supply/Demand Report
U.S. Stocks/Use vs. Average Monthly Nearby Futures Settlement Price August 1995 January 2018 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Cents/Lb. and Percentage 220 200 180 Stocks/Use Nearby Futures 160 140 120 100 80 60 40 20 0 Marketing Year
Demand Influences U.S. Economic Indicators U.S. Exports Speculative Money Mill Fixations Emerging Foreign Issues
Cotton Supply Chain Production Shipping and Handling FARMS GINS WAREHOUSES MERCHANTS Manufacturing Trucking, Rail, and maybe Ocean Shipping Apparel Factory Textile Factory Yarn Mill Ocean Shipping, Rail, and Trucking Retail Clothing and Home Furnishings
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Percent Change Cotton Demand: Influence of Slow Global Economics Growth 10 8 6 4 2 0-2 -4 Real GDP Growth, 1980-2021 World Advanced Economies Emerging Market and Developing Economies World Economic Outlook, October 2017 http://www.imf.org/external/datamapper/ngdp_rpch@weo/oemdc/advec/weoworld
8/7/2014 8/21/2014 9/11/2014 9/25/2014 10/9/2014 10/23/2014 11/6/2014 11/20/2014 11/27/2014 12/11/2014 1/8/2015 1/29/2015 2/12/2015 2/19/2015 3/5/2015 3/19/2015 4/2/2015 4/9/2015 4/23/2015 5/7/2015 5/21/2015 5/28/2015 6/11/2015 6/25/2015 7/16/2015 7/30/2015 8/13/2015 8/27/2015 9/17/2015 10/1/2015 10/15/2015 10/29/2015 11/12/2015 12/3/2015 12/17/2015 1/14/2016 1/21/2016 2/4/2016 2/25/2016 3/10/2016 3/24/2016 3/31/2016 4/14/2016 4/28/2016 5/12/2016 5/26/2016 6/2/2016 6/16/2016 6/30/2016 7/7/2016 7/21/2016 8/4/2016 8/18/2016 9/1/2016 9/8/2016 9/22/2016 10/6/2016 10/20/2016 11/3/2016 11/17/2016 11/23/2016 12/8/2016 12/22/2016 12/29/2016 1/5/2017 1/26/2017 2/9/2017 3/2/2017 3/16/2017 3/30/2017 4/13/2017 4/20/2017 5/4/2017 5/18/2017 6/8/2017 6/22/2017 7/13/2017 7/27/2017 8/10/2017 8/24/2017 9/14/2017 9/28/2017 10/12/2017 10/26/2017 11/9/2017 11/30/2017 12/14/2017 1/11/2018 1/18/2018 000 Running Bales Cents/Lb. 650.00 550.00 450.00 350.00 250.00 150.00 50.00-50.00 Cotton Demand: Short Run Price Influences U.S. Upland Cotton Net Export Sales and Nearby Futures 86.00 82.00 78.00 74.00 70.00 66.00 62.00 58.00 54.00 50.00 Weekly Net Export Sales Nearby Futures August 7, 2014 January 25, 2017
Sidebar: How Mills Buy Cotton Hand-to-mouth spot purchases for near term delivery On-Call purchases with extended delivery date
8/7/2014 8/21/2014 9/11/2014 9/25/2014 10/9/2014 10/23/2014 11/6/2014 11/20/2014 11/27/2014 12/11/2014 1/8/2015 1/29/2015 2/12/2015 2/19/2015 3/5/2015 3/19/2015 4/2/2015 4/9/2015 4/23/2015 5/7/2015 5/21/2015 5/28/2015 6/11/2015 6/25/2015 7/16/2015 7/30/2015 8/13/2015 8/27/2015 9/17/2015 10/1/2015 10/15/2015 10/29/2015 11/12/2015 12/3/2015 12/17/2015 1/14/2016 1/21/2016 2/4/2016 2/25/2016 3/10/2016 3/24/2016 3/31/2016 4/14/2016 4/28/2016 5/12/2016 5/26/2016 6/2/2016 6/16/2016 6/30/2016 7/7/2016 7/21/2016 8/4/2016 8/18/2016 9/1/2016 9/8/2016 9/22/2016 10/6/2016 10/20/2016 11/3/2016 11/17/2016 11/23/2016 12/8/2016 12/22/2016 12/29/2016 1/5/2017 1/26/2017 2/9/2017 3/2/2017 3/16/2017 3/30/2017 4/13/2017 4/20/2017 5/4/2017 5/18/2017 6/8/2017 6/22/2017 7/13/2017 7/27/2017 8/10/2017 8/24/2017 9/14/2017 9/28/2017 10/12/2017 10/26/2017 11/9/2017 11/30/2017 12/14/2017 1/11/2018 1/18/2018 000 Running Bales Cents/Lb. 650.00 550.00 450.00 350.00 250.00 150.00 50.00-50.00 Cotton Demand: Short Run Price Influences U.S. Upland Cotton Net Export Sales and Nearby Futures 86.00 82.00 78.00 74.00 70.00 66.00 62.00 58.00 54.00 50.00 Weekly Net Export Sales Nearby Futures August 7, 2014 January 25, 2017
Cotton Export Total Commitments as a Percent of U.S. Cotton Exports, by Week Percent 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 110 100 90 80 70 60 50 40 30 20 1 23 4 56 7 89 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Source: USDA/OCE/FAS
Cotton Demand: Record Mill Fixations Implies 10 futures bought for every sold http://www.cftc.gov/marketreports/cottononcall/index.htm
1/3/06 2/16/06 4/1/06 5/15/06 6/28/06 8/11/06 9/24/06 11/7/06 12/21/06 2/3/07 3/19/07 5/2/07 6/15/07 7/29/07 9/11/07 10/25/07 12/8/07 1/21/08 3/5/08 4/18/08 6/1/08 7/15/08 8/28/08 10/11/08 11/24/08 1/7/09 2/20/09 4/5/09 5/19/09 7/2/09 8/15/09 9/28/09 11/11/09 12/25/09 2/7/10 3/23/10 5/6/10 6/19/10 8/2/10 9/15/10 10/29/10 12/12/10 1/25/11 3/10/11 4/23/11 6/6/11 7/20/11 9/2/11 10/16/11 11/29/11 1/12/12 2/25/12 4/9/12 5/23/12 7/6/12 8/19/12 10/2/12 11/15/12 12/29/12 2/11/13 3/27/13 5/10/13 6/23/13 8/6/13 9/19/13 11/2/13 12/16/13 1/29/14 3/14/14 4/27/14 6/10/14 7/24/14 9/6/14 10/20/14 12/3/14 1/16/15 3/1/15 4/14/15 5/28/15 7/11/15 8/24/15 10/7/15 11/20/15 1/3/16 2/16/16 3/31/16 5/14/16 6/27/16 8/10/16 9/23/16 11/6/16 12/20/16 2/2/17 3/18/17 5/1/17 6/14/17 7/28/17 9/10/17 10/24/17 12/7/17 1/20/18 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0-20,000-40,000-60,000 Hedge Fund Buying Has Supported the Price Rally January 3, 2006 Through January 30, 2018 No. of Contracts Cents/Lb. 220 200 180 160 140 120 100 80 60 40 20 0 Index Funds Hedge Funds Nearby Futures Source: Commitment of Traders Supplemental Report (Futures and Options)
Two Emerging Issues Affecting U.S. Exports: 3rd Indian Crop 1st Chinese Export Demand 2nd
Indian Production 2017 Production: 29.30 million bales 2017 Consumption: 24.75 million bales Production issues this year include early excess rains/floods, bollworm outbreaks, and harvest time rains.
Chinese Cotton Belt 2017 Production: 26.40 million bales 2017 Consumption: 40.00 million bales 2017 Net Deficit: 13.60 million bales Deficit more than covered by: 1) Modest Imports (projected 5.1 million bales) and 2) Chinese Reserve Sales of 14.8 million bales, leaving ca. 22 million inventory remaining in the Reserve. Note: Many expect China replace supplies in the reserve at some point, implying a lot more import demand.
Will the 2017/18 Balance Sheet Fundamentally Change???? 2016/17 Est. 2017/18 Proj. Area Million Acres Planted 10.07 12.61 Harvested 9.51 11.35 Pounds Yield/Harvested Acre 867 899 Million 480 Pound Bales Beginning Stocks 3.80 2.75 Production 17.17 21.26 Imports 0.01 0.01 Supply, Total 20.98 24.02 Domestic Use 3.25 3.35 Exports, Total 14.92 14.80 Use, Total 18.17 18.15 Unaccounted 0.06 0.17 Ending Stocks 2.75 5.70 Avg. Farm Price 68.00 67.00-71.00 January 12, 2018 USDA Supply/Demand Report
2018 Supply Considerations Higher U.S. planted acres Chance of continued dryness at planting time from La Niña Potentially large supply
Million Acres (Ratio=5.1 on Jan. 12) Ratio of December Corn vs. Cotton Futures, Three Month Average First Quarter, vs. June Cotton Planted Acreage Report 17 16 01 15 14 03 00 06 04 05 11 02 13 12 12 11 10 9 17 10 14 07 13 16 08 15 09 8 3.50 4.50 5.50 6.50 7.50 8.50 Ratio
Current Dryness
Cotton Balance Sheets 2016/17 Est. 2017/18 Proj. 2018/19 JR Est. Area Million Acres Planted 10.07 12.61 13.00 Harvested 9.51 11.35 10.40 Pounds Yield/Harvested Acre 867 899 850 Million 480 Pound Bales Beginning Stocks 3.80 2.75 5.70 Production 17.17 21.26 18.43 Imports 0.01 0.01 0.01 Supply, Total 20.98 24.02 24.14 Domestic Use 3.25 3.35 3.35 Exports, Total 14.92 14.80 14.50 Use, Total 18.17 18.15 17.85 Unaccounted 0.06 0.17 0.00 Ending Stocks 2.75 5.70 6.29 Avg. Farm Price 68.00 67.00-71.00 January 12, 2018 USDA Supply/Demand Report
Taking Action Old crop and new crop prices are relatively high Although highly discounted cash bids are hard to swallow, but Consider early pricing or hedging of some new crop
Different Ways of Doing the Same Thing CORE POSITION COST SAVING MEASURES Cash Contract with Merchant Buy Call Also Sell Call Buy Put Hold Cash Open Also Sell Put Also Sell Call Sell Futures Buy Call Also Sell Call
Buy 70 Put for 2018 Crop Strike Price 70.00 Buy 70 Put Premium 2.26 Net Short Futures Position 67.74 February 5, 2018, Dec. 18 Futures @ 74.66 Net Cost for 50,000 Lb. Contract = $1,130
Buy 75 Put for 2018 Crop Strike Price 75.00 Buy Dec. 18, 75 Put -4.03 Net Short Futures Position 70.97 Downside price move covered, upside open February 5, 2018, Dec. 18 Futures 74.66 Cost for 50,000 Lb. Contract = $2,015
75:65 Put Spread Strike Price 75.00 Buy 75 Put Premium -4.03 Sell 65 Put Premium +0.92 Net Cost -3.01 Net Short Futures Position 71.99 February 5, 2018, Dec. 18 Futures @ 74.66 Net Cost for 50,000 Lb. Contract = $1,505
9/1/17 9/6/17 9/8/17 9/12/17 9/14/17 9/18/17 9/20/17 9/22/17 9/26/17 9/28/17 10/2/17 10/4/17 10/6/17 10/10/17 10/12/17 10/16/17 10/18/17 10/20/17 10/24/17 10/26/17 10/30/17 11/1/17 11/3/17 11/7/17 11/9/17 11/13/17 11/15/17 11/17/17 11/21/17 11/24/17 11/28/17 11/30/17 12/4/17 12/6/17 12/8/17 12/12/17 12/14/17 12/18/17 12/20/17 12/22/17 12/27/17 12/29/17 1/3/18 1/5/18 1/9/18 1/11/18 1/16/18 1/18/18 1/22/18 1/24/18 1/26/18 1/30/18 2/1/18 December 2018 Futures Settlement Price vs. December 75 Put Option Contracts and 75-65 Put Spread Cents/Lb. 76.00 74.00 72.00 70.00 68.00 Cents/Lb. 10 9 8 7 6 5 4 66.00 3 Daily Settlement Price $.75 Put $0.75-$0.65 Put Spread Daily September 1, 2017 February 2, 2018
What About Just Selling Dec. 18 Futures Straight Futures Hedging Feb. 5, 2018 sell Dec. 18 Futures @ 74.66 Effective Floor Price = Futures less Expected Basis, i.e., you avoid option premiums Will receive effective floor price (subject to basis risk) regardless of how low or how high Dec 18 moves Fully exposed to margin risk (cash flow and stomach lining)
March 2018 Cotton Futures
December 2018 Cotton Futures
Weekly December Cotton Futures
Revenue University of Missouri Extension Southeast Missouri Non-Irrigation Crop Budgets 2018 Corn GMO Soybean Roundup Ready 2 Xtend Soybean Liberty Link Cotton Wheat D. C. Soybean L.L. Estimated Yield (Bu/Acre) A 165 48 48 900 70 42 Estimated Price ($/Bushel) B $3.70 $9.80 $9.80 $0.730 $4.67 $9.80 Estimated Gross Revenue ($/Acre) $610.50 $470.40 $470.40 $657.00 $326.90 $411.60 Total Variable Cost $ 423.38 $ 264.14 $ 249.72 $ 460.10 $ 235.97 $ 239.27 Total Costs (Excluding Land) $ 502.38 $ 311.14 $ 296.72 $ 590.10 $ 278.97 $ 274.27 Total Cost (Including Land or Rent) $ 664.38 $ 473.14 $ 458.72 $ 752.10 $ 359.97 $ 355.27 Estimated Returns Returns Above Variable Costs $187.12 $206.26 $220.68 $196.90 $90.93 $172.33 Returns Above Mach & Buildings $108.12 $159.26 $173.68 $66.90 $47.93 $137.33 Returns Above Total Costs ($53.88) ($2.74) $11.68 ($95.10) ($33.07) $56.33 Breakeven Price $4.03 $9.86 $9.56 $0.84 $5.14 $8.46 Breakeven Yield 180 48 47 1,030 77 36
Revenue Corn GMO Soybean Roundup Ready 2 Xtend Soybean Liberty Link Cotton Rice Convent. Wheat D. C. Soybean L.L. Estimated Yield (Bu/Acre) A 220 65 65 1300 180 75 50 Estimated Price ($/Bushel) B $3.70 $9.80 $9.80 $0.730 $5.10 $4.67 $9.80 Estimated Gross Revenue ($/Acre) $814.00 $637.00 $637.00 $949.00 $918.00 $350.25 $490.00 Total Variable Cost $ 539.95 $ 308.02 $ 289.48 $ 510.26 $ 485.75 $ 235.97 $ 284.90 Total Costs (Excluding Land) $ 709.95 $ 442.02 $ 423.48 $ 726.26 $ 649.75 $ 278.97 $ 405.90 Total Cost (Including Land or Rent) $ 871.95 $ 604.02 $ 585.48 $ 888.26 $ 811.75 $ 359.97 $ 486.90 Estimated Returns University of Missouri Extension Southeast Missouri Irrigation Crop Budgets 2018 Returns Above Variable Costs $274.05 $328.98 $347.52 $438.74 $432.25 $114.28 $205.10 Returns Above Mach & Buildings $104.05 $194.98 $213.52 $222.74 $268.25 $71.28 $84.10 Returns Above Total Costs ($57.95) $32.98 $51.52 $60.74 $106.25 ($9.72) $3.10 Breakeven Price $3.96 $9.29 $9.01 $0.68 $4.51 $4.80 $9.74 Breakeven Yield 236 62 60 1,217 159 77 50
CONTACT INFO Phone: 979-845-8011 Email: jrcr@tamu.edu Cotton Spin Column, Southwest Farm Press http://southwestfarmpress.com/author/john-robinson The Cotton Marketing Planner Newsletter http://agrilife.org/cottonmarketing/ Twitter: @aggie_prof Facebook: https://www.facebook.com/agrilifemastermarketer