Cotton has seen impressive gains in recent weeks, up 746 points in the October contract since the August open, and the March contract also pushing past the 90-cent mark over that time. The rally has been supported by rising oil prices (see previous item about the relationship between cotton and crude), as well as hopes for increased purchases from China either as a diplomatic tactic or to earnestly meet domestic consumption needs after seeing a pullback in cotton acres in their own country this year.
A U.S dollar index trading at three-month lows has also helped significantly, as roughly 85% of U.S. cotton is ultimately bound for export.
While outside markets and speculation regarding demand have helped lift futures so far, markets will begin looking closer at supply fundamentals as the U.S. harvest approaches. Condition ratings are showing the impact hot and dry conditions in west Texas and the Mississippi Delta have had over the course of the summer and can offer some clues to where production totals may end up.
The condition ratings in cotton have a weaker relationship to final yield results than those seen in corn and soybeans, but are still worth examining. The crop is notoriously difficult to kill, making yield potentials difficult to assess during the growing season.
While condition ratings may not offer much guidance on cotton yields, they do track surprisingly well with abandonment rates, which can be just as important when calculating production totals. Crops that are totally abandoned and not harvested are not included in USDA yield averages, which explains some of the discrepancy between conditions and yields.
Using a regression model to examine cotton condition ratings at the third week of August over the past 40 years, and comparing them to USDA’s final harvested-to-planted ratio indicates that farmers would abandon 23.4%, or 2.32 million acres, leaving 7.54 million to be harvested based on historical trends. That abandonment figure is nearly exactly in line with USDA’s current estimate of 2.31 million acres and is reflective of the 29% of the crop rated very poor to poor as of August 23. That abandonment rate would be up from 15.6% last year when cotton rated very poor to poor was at 13% at this time.
Cotton harvest is still a few weeks out from beginning in most of the U.S., and conditions can and will change over that time. World Weather Inc.’s current forecast calls for continued crop stress to finish out August in the southern U.S., and provides enough concern to warrant keeping a close eye on supply fundamentals into the fall. If conditions continue to slide to close out the growing season, production could be lowered by an increase in failed acres.