U.S. Cotton: Big Acres and Tepid Demand
For most of 2018, U.S. cotton prices declined as acres and production expanded on growing Chinese supplies. During the current marketing year, U.S. cotton acres grew to 14 MA, which was the largest since 2011, and the fourth largest since 2000. The current trend of adding cotton acres in the U.S. has come primarily in the southern Plains, where winter wheat producers are replacing wheat.
From 2016 to 2018, U.S. cotton acres expanded the most since 2000 with annual growth averaging 1.8 MA per year. Since 2016, U.S. cotton acreage has increased by 40% and averaged 18% growth per year.
From the demand side, U.S. cotton is an export-driven commodity with approximately 80% of 2018 production being exported.
While cotton prices have sharply declined this year, we see the 2019/20 marketing year as presenting similar headwinds on the demand side:
First, the decline in oil prices makes synthetic fibers more competitive to cotton.
Second, the U.S.-China trade tensions do not help.
Third, Chinese production is starting to rise on farmer subsidies. The brightest spots for U.S. cotton are that Chinese stocks are declining at a rapid rate which could lead to increased import behavior.
U.S. Supplies: Acreage Growth Coming From HRW Wheat
In the key producing states of hard winter wheat, wheat acres reign supreme, but the recent gain in cotton acres since 2016 seems to be articulating a broader underlying domestic trend where the U.S. producer is aggressively reallocating wheat acres to other crops. Driven by compressed farm economics and a shift in the global structural supply side dynamics, the shift away from wheat to cotton in Kansas, Oklahoma and Texas has been acute. Recent acreage growth from 2016 to present in percentage terms in Oklahoma and Kansas has been impressive, but the number of absolute acres dedicated to cotton in both states is still small. Small is a relative term, but with total acres just under 1 MA, it pales when compared to the largest producing states: Texas, Georgia and Arkansas.
For measurement, wheat acres in both states total just over 12 MA, while total cotton acres are just 8% of wheat’s. During the last three years, Texas – the nation’s largest domestic cotton producer – has also experienced a dramatic acreage increase. Since 2015, cotton acres in Texas have increased by 60% to 7.7 MA, which is the largest number of acres for the state since 2000. During this time, cotton acres have grown by an average of 17% per year. At the same time, wheat acres in Texas declined by 26% with an average yearly decline of 9.5%. From 2015-2018, cotton acres in Texas, Oklahoma and Kansas have risen by 3.6 MA, + 76%, while wheat acres have declined by 20%.
Cotton Demand: Mostly Bearish Inputs
From the demand side of the equation, U.S. cotton is primarily an exportable commodity and the fiber has not been immune from U.S.-China trade related complications. China’s 25% tariff levy in July was not helpful, but since the country imports approximately 6% of its cotton from the U.S., purchases by local mills are both subjected to and limited by tariff-rate quotas (TRQ). While China remains an important export client for the U.S. cotton industry, China is attempting to increase domestic production by providing subsidies to farmers to expand acreage. The drop in global energy prices is also a bearish input as synthetic fibers become more affordable than the natural fiber.
Yet, buried inside the demand data is a bullish variable. Chinese cotton stocks have been drawn down 64% from their 2014 high. Since Chinese stocks peaked in 2014 at 66MB, they have experienced a rapid drawdown. Reasons for the drawdown are primarily attributed to a restructuring of the domestic price program which helped widen the gap between production use. The second reason can be attributed to China’s import access which was limited to the WTO TRQ and essentially allowed the Chinese to build reserves while addressing the domestic production/use gap.
As the central government has recently provided subsidies to encourage expanded acreage, the primary question for 2019 revolves around how far the government is willing to let reserves get drawn and will there be an incentive to increase the import program.
Currently there are no immediate global supply or demand constraints that could provide material support to the cotton complex. Despite that global cotton production has declined by 4.9 MB/-4%, YoY estimated production at 118 MB is in a normalized range. With Australian production declining by 48% YoY, it is believed that Asian supplies could be tight. However, the reality is that Australia lost 2.2 MB of production, which is almost offset by the 1.8 MB YoY increase in Brazilian production.
The drop in crude prices is not an immaterial variable, as synthetic fibers like polyester and rayon have become more competitive. Increasing acres in the U.S. should persist in the ‘19/20 crop year as the move from wheat to cotton continues. While the 25% Chinese import tariff on U.S. cotton doesn’t help the complex, it remains to be seen if any progress inside the U.S.-China trade negotiations can result in a positive impact on the complex. Please contact your FBN FMA with any reports on cotton and wheat acres estimates.
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