Cotton Marketing News– September 11, 2014

Cotton Marketing News– September 11, 2014

Don Shurley

University of Georgia

Today’s Numbers and Market Update.  As expected, the US crop got smaller.  Today’s crop estimate is 16.54 million bales—down almost 1 million bales from the August estimate.  Acreage planted was reduced, abandonment was increased slightly, and yield was lowered.  As a result of the smaller crop, projected US exports for the 2014 crop year were reduced 700K bales.

The India crop was increased 1 million bales; the China crop was unchanged.  World Useage (demand) was lowered about ½ million bales.  Projected 2014-15 ending stocks for China were increased; World stocks were increased; stocks outside of China were also increased.

Overall, the report is probably neutral to slightly bearish.  The smaller US crop should provide some support for prices but the increase in total World production, reduction in Use, and increase in stocks may also weigh on the market.  So far today, prices (Dec14 futures) are up at currently in the 68-cent area.

There is likely some resistance at this 67 to 68 cent area.  I don’t know that there are currently enough positives to break through and move closer to the 7’s; but hopefully today’s numbers will at least solidify the bottom and the trading range around 65 cents.
Early Thinking About 2015.  Prices for the 2015 crop (Dec15 futures) are currently around 69 cents/lb.  Everyone’s first thought is “We won’t/can’t plant cotton for that”.  Perhaps so, but what else will be planted?  Prices for all row crops are down compared to previous years.  There is beginning to be thought circulating that acreage could be down but maybe not as much as you would think. 

Based solely on relative price ratios, soybeans might be the only still somewhat-shining star.  Corn has actually slipped so much that cotton has gained in relation to corn.  Soybeans and corn represent agronomic and economic alternatives to cotton in some areas of the Cotton Belt, but not all.  Peanuts are also an alternative in some areas.

2015 cotton at 70 cents would be 2 disappointing years in a row.  But there are potential positives out there that the market has chosen to ignore for now.  For example, cotton prices could improve if acreage is reduced and World production continues to trend down and demand continues to improve.  The narrowing of this “gap” is still tempered by the large level of Chinese stocks but much will depend on Chinese policy and the unsure quality of that stockpile.

I believe most, not all but most, cotton-producing farms likely have more cotton base than any other crop base.  Cotton base is now known as Generic Base.  Any and all acreage planted to a “covered commodity” (corn, soybeans, grain sorghum, wheat,peanuts, etc. excluding cotton) will automatically be assigned by FSA to the Generic Base up to the maximum of the Generic Base.  These acres planted on Generic Base will be eligible for any PLC or ARC payment.

Therefore, it seems to me that potential PLC and ARC payments should be considered when making planting decisions on Generic Base; but this is a difficult and near impossible task particularly for ARC since any payment depends in-part on how actual yield compares to the expected yield.  Perhaps it’s better to make planting decisions, as always in the past, based on crop net returns excluding payments and just let the payments be what they will be.  It depends on how comfortable you are and how much risk you are willing to take in projecting PLC and ARC.

Farm Bill Cotton Update.  STAX is the new “safety net” for cotton beginning with the 2015 crop.  But, STAX is optional—cotton producers may elect STAX or SCO or nothing.  STAX is a county/area revenue policy that is “stacked” on top of the farms existing (Companion) yield or revenue policy.  It covers “shallow losses” of up to 20% of the expected county/area revenue.  Producers, as they already do, must decide what type and level of Companion Policy they want, then if they want STAX, or SCO, or neither.

STAX triggers based on what happens to county/area revenue, not your actual farm experience.  The STAX decision and purchase is year to year.  You will purchase STAX through your insurance provider and it is expected that this decision will have to be made by your normal sales closing deadline.  

Cotton producers are reminded that sign-up for the Cotton Transition Assistance Program (CTAP) continues through October 7.  Producers must apply at their local FSA office.  This payment will be 9 cents per lb times the farm’s cotton Direct Payment Yield on 60% of the farm’s 2013 cotton base acres.  This payment, however, is subject to budget sequestration cut of 7.2% if the application is approved before October 1 and 7.3% if approved after October 1.  This .1% may not sound like much but it may be enough to pay for a jug of herbicide or something else.  Apply before October 1 to avoid the extra .1% reduction.

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