Agricultural Outlook for Cotton 2012

Darren Hudson, Director, Cotton Economics Research Institute, Texas Tech University

Maria Mutuc, Post-Doctoral Associate, CERI

39th Annual Bankers Agricultural Credit Conference, November 18, 2011International Cultural Center, Texas Tech University

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Year in Review

• “Unmitigated disaster…” Me, Bloomberg, September 14, 2011• Although not the largest year-on-year percentage decline in production, by far the

largest loss in terms of crop value

• Insurance helped, but financial impact was real and if we see consecutive years of drought, we will start seeing farm failures.

• Weaker demand kept a lid on prices this year, despite the shortfall in production

• Stocks still tight, but more availability than in 2010; increase in economic activity will still put substantial upward pressure on prices, but outlook there is not particularly strong

Economic Impact of Drought 2011

State Production Losses by Crop, $US B

Livestock

Lost hay production

Cotton

Corn

Wheat

Sorghum

2.06

0.75

1.8

0.327

0.243

0.063

Source: Texas AgriLife

Effects on upstream & downstream industries

State-wide Economic Impacts by Crop, $US B

Backward

Linkages,

US$2.9 B

Forward

Linkages,

US$0.58

B

Livestock

Lost hay production

Cotton

Corn

Wheat

Sorghum

2.64

1.46

3.48

0.53

0.48

0.12

Source: Texas AgriLife

U.S. Futures Contracts Quotes (as of Nov 1)

Dec 2011 Contract Dec 2012 Contract

Largely irrelevant

Current momentum is sideways at 94-98.

A 94-98 futures translates to a local cash price of 87-91 cents.

U.S., 1990-2020f

Production (‘000 bales) and Yield (lbs/acre)

'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'200

5000

10000

15000

20000

25000

0

0.5

1

1.5

2

2.5

Production Yield (R-axis)Source: Cotton Economics Research Institute

U.S., 1990-2020f

Ending Stocks (‘000 bales) and Farm Price (cents/lb)

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

'16

'18

'20

0

2000

4000

6000

8000

10000

12000

0

10

20

30

40

50

60

70

80

90

100

Ending Stocks Price (R-axis)

Source: Cotton Economics Research Institute

World, 1990-2020f

Production (‘000 bales) and Yield (lbs/acre)

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

'16

'18

'20

0

20000

40000

60000

80000

100000

120000

140000

160000

0

20

40

60

80

100

120

140

160

World Production Cotton A-index (R-axis)Source: Cotton Economics Research Institute

India, 1990-2020f

Production, Mill Use and Net Exports (‘000 bales)

'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

Production Domestic Mill Use Net Exports

Source: Cotton Economics Research Institute

China, 1990-2020f

Production, Mill Use and Net Exports (‘000 bales)

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

'16

'18

'20

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

Production Domestic Mill Use Net Exports

Source: Cotton Economics Research Institute

Brazil, 1990-2020f

Production, Mill Use and Net Exports (‘000 bales)

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

-4000

-2000

0

2000

4000

6000

8000

10000

12000

Production Domestic Mill Use Net Exports

Source: Cotton Economics Research Institute

Pakistan, 1990-2020f

Production, Mill Use and Net Exports (‘000 bales)

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

14000

Production Domestic Mill Use Net Exports

Source: Cotton Economics Research Institute

Conclusions

• Expectations for higher U.S. and world production, partially on yield gains, but some recovery of planted area as well.

• Longer-term moderation of prices, but still well above historical levels.

• Although definitively tied to ethanol production, US cotton prices are likely more responsive to weather events (supply-side) and economic growth and textile production in Asia (demand-side); need to pay attention to weather events in China and India (and to some extent Brazil and Australia) to adjust your expectations for price.