Agriculture is one of those areas that lends itself to old sayings, and there are a couple that seem appropriate at the moment. One is: don’t count the bales until they are in the barn.
This is apt considering the recent hurricanes that swept through parts of the cotton belt. Given the nature of calculating crop damage, which involves the complicated process of estimating how much there would have been, it will still be a while until accurate damage figures are released.
What is known is that producers along the Texas coast were looking at a good crop, supported by gentle growing conditions for much of the spring and summer. Strong yields and high quality were widely expected in that area when Harvey blew through. This was heartbreaking for producers, who had been able to watch a solid crop develop only to have it taken away at the very end. Nonetheless, southern Texas is home to the earliest harvested cotton in the U.S. and some of the fiber from the region had been pulled from the fields ahead of the storm. Whatever cotton that made it through gins and into warehouses should have been protected.
While southern Texas was actively harvesting when the hurricane arrived, cotton in the southeast U.S. was less developed when Irma arrived. Cotton is most vulnerable to storms when bolls are open and the fiber is exposed. Being naturally absorbent, cotton in open bolls can become heavy with rainfall and winds can knock them to the ground making that fiber impossible to harvest. When hurricane Irma arrived, many of the states in its path had only 30 percent to 50 percent of bolls open. When bolls are closed, fiber is not exposed to the elements and fields are more likely to survive storm damage.
In terms of area, Irma was a much bigger storm than Harvey. Irma’s initial power and projected path suggested it could have a major impact. Although a distant second to Texas, Georgia is the second largest cotton producing state in the U.S. (in 2017/18 Texas is projected to grow 9.3 million bales and Georgia is expected to grow 2.7 million bales). The majority of Georgia’s cotton is grown in the southern part of the state, which would have been in the direct forecasted path.
Thankfully, Irma quickly lost steam after making landfall in southern Florida. The storm’s weakening, in combination with the fact that many fields in the southeast did not have bolls open, suggests that the damage to Georgia’s production was less than feared and that the combined effects from hurricanes Harvey and Irma were not enough to change the primary storyline for the 2017/18 crop year. That dominant storyline is that the U.S. is growing a lot of cotton.
With prices for corn and soybeans low, U.S. cotton growers increased planting by 15 percent last crop year and another 20 percent this spring. On top of the increase in acreage, and apart from the hurricanes, the weather has been generally good.
The United States Department of Agriculture (USDA) sends teams of observers into the fields each week, and throughout the summer and early fall those observers have consistently indicated that crop conditions are the best they have seen in a decade. Current forecasts indicate yield will set a new record, and with this year’s increase in acreage, the U.S. is projected to produce its third largest harvest ever (21.8 million bales in 2017/18, up from the large 2016/17 crop of 17.2 million bales).
The forecast for a very large U.S. harvest brings to mind a second old saying in the cotton market, which is: big crops tend to get bigger. This saying is rooted in forecasters’ inclination to be cautious and to make incremental upward revisions, especially when confronting the possibility of new records, such as the record yield projected for the U.S. this season. However, this saying has implications for the market beyond the U.S. India, which has also enjoyed generally favorable growing conditions over the past several months, is already expected to collect the second largest harvest on record and recent revisions to crop forecasts have been moving higher. China, Pakistan, Australia, Brazil, West Africa, all of the world’s major cotton producing countries and regions are expected to have larger crops in 2017/18 and the world cotton harvest is projected to be nearly 15 percent larger than it was last year.
While supply promises to be very large, an important feature on the demand side is that China is expected to continue to restrict imports near recent low levels. In the past, when China was importing 10-15 million bales from the rest of the world, China absorbed surplus production from the rest of the world. The combination of low Chinese imports and a big crop outside of China promise a significant accumulation of supply outside of China.
Since supplies outside of China are generally able to be traded without restriction, this implies downward pressure on prices. The fact that current forecasts indicate that supplies outside of China will rise to a new record suggests that the downward pressure on prices could be heavy as the world’s cotton harvesting intensifies over the next several months. As the recent hurricanes highlight, it is important not to count all of the bales until they have been harvested, but it should be safe to assume that this big global crop will stay big and can be expected to keep a lid on prices.