Forecasting prices into the new cotton season requires, without doubt, considerable attention on US 2017/18 prospects.
This is unsurprising, given a 21 per cent year-on-year hike in US cotton acreage forecast by the United States Department of Agriculture (USDA) which, if realised, would see the world’s largest exporter boost production by two million bales, to over 19 million bales – an 11-year high.
This increase forms the basis for Rabobank’s anticipated rise in 2017/18 global export availability, an essential factor in our lower international price outlook.
However, while this US production hike is expected to be large and particularly influential on ICE #2 Cotton futures prices, there are some considerable risks to overcome before we see the price fall.
The incentive for US growers to plant cotton this season has primarily been financial.
Within an environment of low-priced grains, cotton – at 34-month price highs – stood out as the shining star for growers.
Back in March, with the new crop cotton-soybean price ratio reaching near eight-month highs, it was inevitable that US prospective cotton acreage was bumped higher.
However, the location of this increase has sparked a lot more interest.
Texas plantings experienced the largest hike to account for, according to the USDA, close to 60pc of US plantings in 2017 – 46pc of total US production, a potential nine million bales. Texas planting progress has been excellent so far with 52pc of cotton now in the ground, on par with the five-year average pace.
This is a positive start, as additional sown acres might generally delay planting progress.
It is therefore a credit to excellent early-season soil moisture and operational ease through the 2017 planting window – both of which have given the crop a great chance to establish.
So, prospects so far look exceptional. However, given the concentration of production across a relatively small area, production risks are higher.
Unfavourable weather here could have serious consequences for global cotton prices, and there’s still plenty of time for this to occur. We’re not forecasting a poor crop, rather highlighting the risks for the coming season.
The volume of production resting specifically in the Texas panhandle and southern plains is considerable – some four million acres, accounting for 33pc of the national area forecast.
A yield downgrade here through drought or harvest difficulties could wipe several million bales off US output, and reduce volumes available for export.
Furthermore, the US has been lucky enough to see the crop abandonment rate lower than 7pc for the past two years, but rates of over 20pc – often driven by tough seasonal conditions – have been fairly common since 2008.
What’s the relevance of this to the Australian grower? This risk has the potential to prompt a price premium on the ICE #2, when weather begins to appear unfavourable for instance, and could therefore bring about a hedging opportunity in the coming months – prior to the US picking season in September.
Rabobank forecasts Australian raw cotton cash prices to remain above $520 a bale through the coming 12 months, assuming a softening AUD/USD rate and a fall in the ICE #2 as global cotton availability grows.
However, given the concentration in US acres it’s worth paying attention to the growing season across Texas, as much continues to ride on good seasonal conditions.
