Market Matters Blog

U.S cotton acreage is expected to drop this year. Big surprise. Corn and soybeans are simply more profitable. But how many acres will cotton lose? That's up for debate, and there's still time for rally in cotton prices to change farmers minds. But right now, cotton looks to be facing a second consecutive year of million-acre losses.

Informa Economics estimates that cotton acreage will decline by 17% from last year, nearly 2 million acres, to 10.3 ma. Agriculture lender Rabobank forecasts cotton area even lower at 9.985 million acres.

Cotton's production cost increased by 12.45% from 2007 and 2011, according to the USDA, and production costs are expected to increase another 4% by 2014. And that's one factor dragging back cotton's comparative profitability to corn and soybeans.

Globally, acres are switching to other crops too, and Rabobank expects a 10% decline in acres from last year.

Smaller cotton production and strong imports from China will reduce the globe's exportable cotton supply by 29%, switching the market trend to a supply-deficient stance. Rabobank recent cotton outlook suggests the stocks-to-use ratio outside of China could drop to the lowest level since 1997/98.

Let's put China's buying into perspective.

The cotton market in China is in a different situation than the rest of the world. Prices are high and supply is low. Earlier this month China sold nearly 800,000 bales from its reserve stocks for 60 cents per pound more than the prevailing world price.

The import arbitrage is highly in China's favor, Rabobank reports, leading to the second fasted import pace in the last five years, nearly 7.7 million bales in the first five months of the marketing season. Chinese imports are expected to represent 34% of the cotton trade this year.

So here's the question that really matters: What does this all mean to a cotton farmer? Rabobank thinks cotton price will improve 17% from the fourth quarter of 2012 and the fourth quarter of 2013. And if Chinese demand stays where it is and the global economy rebounds (increasing demand for clothing), that could make cotton a more attractive crop to plant next year.

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