Cotton Futures Close Limit Up as US Production Wilts

Cotton futures closed up at their daily limit of 500 points Monday as participants are still processing last Friday's extremely bullish WASDE. This marks the second consecutive trading day of a limit up move. 

On Friday, the USDA slashed the 2022 US cotton crop by 19%, nearly three million bales, mostly due to production declines in Texas. That action, in turn, dropped domestic carryout to 1.80 million bales, the lowest ever recorded.

The US is the 3rd largest global producer and No. 1 exporter of cotton worldwide. A smaller crop will have an outsized effect on global exportable supplies. 

Texas is forecast to harvest 2.9 million bales of cotton this year, compared to 7.7 million bales in 2021. Total US cotton production is expected to fall 28 percent, or 12.57 million bales, this year from last year’s 17.52 million bales. The US stocks-to-use ratio of 12.6 percent is 8 percentage points lower than in 2021/22 and the lowest in recent history.

India could emerge as a bright spot for global supplies, however, as the current monsoon season is faring well. Gro’s Navigator for Agriculture app shows above average precipitation in the cropland regions weighted to cotton. As India is the second largest producer of cotton worldwide and the third largest exporter, an uptick in the country’s cotton production could aid the shortfall out of the US. India cotton area also increased versus the prior year. 

The cotton weighted Gro Drought Index (GDI) for Texas, as seen via the Gro Navigator for Agriculture app, indicates the second worst drought in recorded history. Gro’s Drought Index has been indicating high levels of drought since the start of the year. GDI readings are a strong predictor of abandoned acres in Texas’ cotton-growing areas, a Gro analysis shows. 

Currently, the USDA expects Texas to abandon 69% of cotton acres. Over the past decade, Texas farmers abandoned an average of 29% of cotton acres, deeming them uneconomic to harvest. A previous peak came during the historic drought in 2011, when 62% of cotton acres were abandoned and cotton yields slumped by 16% year over year. 

In general, it's now too late for rain to benefit Texas cotton, though rain would be welcome to begin replenishing soil moisture for next year.