Cotton acreage may fall 40% in Brazil – Plexus report (United States Of America)

Plexus Cotton Limited reported that the ongoing heat wave, which has gripped most of the United States since the middle of June, continued to be the main story this week. While the cotton market seems to be unfazed by this weather event, grain and soybean prices continued to explode towards their all-time highs.

The cotton market doesn’t seem to care much about grain and soybean prices at the moment and instead focuses on the bearish cotton story (huge ending stocks, defaults, economic woes).

Even though this huge price disparity that currently exists between cotton and soybeans/corn has no bearing on crops that are already in the ground, this will likely change once the time to make future planting decisions arrives.

At the current ratio between cotton and its competing crops we expect to see a significant drop in cotton acres!  Brazil will probably be the first major cotton producer that reacts to this enormous price difference and we would not be surprised to see cotton acreage drop by 30-40%. Others will follow next spring, including the US Delta and Southeast.

Even without major weather problems, this trend towards “food acres” will continue over the coming years, as it becomes increasingly difficult to meet the ever-rising demands of a growing global middle class. In such a scenario the last thing cotton can allow to happen is to make itself even more unattractive than it already is, otherwise we will all be wearing polyester some day.

Today the People’s Bank of China, the ECB and the Bank of England announced additional measures to shore up their sagging economies. China cut its one-year lending rate by 31 basis points and the deposit rate by 25 basis points, while the ECB dropped its benchmark interest rate by a quarter percent to 0.75 percent, the lowest level since the Euro was created in 1999. The Bank of England left its rate unchanged at 0.5 percent and instead opted to infuse another 50 billion British Pounds into the economy.

These moves come as no surprise, as cutting rates and printing money are unfortunately the only bullets left to combat deflationary forces. If left alone we would see a massive implosion of asset prices, but governments and central banks will do whatever it takes to prevent this from happening.

There is really no contest, because central banks have unlimited powers in regards to money printing and they will ultimately succeed in inflating assets back up. However, the heavy price to be paid for this unfettered money printing is the debasement of currencies and potentially the end of the current financial system.

July corn futures closed at 7.73 dollars/bushel, which is not far from the record 7.99 dollars/bushel set just over a year ago. Nearby corn futures have rallied by 2.22 dollar/bushel since making a low of 5.51 dollars/bushel on June 1.

What is unusual about the current heat wave is that it is occurring so early in the summer, therefore breaking all kinds of temperature records. Just last week alone there were over 2000 heat records matched or broken in the United States.

Typically the ratio between new record highs and record lows is around 1-to-1, as some parts of the nation experience heat, while others are cooler than normal, but over the last two weeks this ratio has been at 10-to-1 in favor of record highs.

With the exception of the Pacific Northwest, basically the entire country has been suffering from oppressive heat. The most serious consequence from these record temperatures and the lack of rainfall is the high evaporation rate.

After nearly two years of La Niña, which ended in April and which left 56% percent of the country in dry or drought conditions, the US experienced a warmer than normal spring, which quickly evaporated the precipitation that fell during the second quarter. At the end of June no less than 72% of the nation was experiencing dry or drought conditions and this percentage is likely to go up further.

So where do we go from here? For now the cotton market can still afford to play out bearish tendencies, but the time will come when market participants can no longer ignore these much more attractive competing crops. If food crops maintain their current price level or move even higher, cotton prices will sooner or later have to rally.

There are two scenarios under which that may happen. Either cotton continues to make itself unattractive and loses a large percentage of its acreage next season, which will eventually force prices higher, or cotton gets with the program and rallies in defense of its acreage. It’s just a matter of timing! In the meantime we are likely going to see a continuation of the trading range, with support in the mid-60s and resistance in the mid-70s.