Insight Focus
- USDA has slashed its 2022/23 US cotton output forecast, with 66% of the area suffering drought.
- Brazil’s planting window, which doesn’t start until December, gives producers there time to respond.
- Brazilian cotton production has been revived with the help of soybeans and the ‘safrinha’ corn crop.
The severe drought that hit part of the US cotton belt – especially Texas, the country’s largest producer – has caused the US Department of Agriculture to cut its 2022-23 production estimate drastically. The harvesting of this crop is about to begin. In its monthly supply and demand report released on 12 August, the USDA cut its production forecast to 2.74m tonnes from the 3.37m it estimated last month. The new estimate is 28% lower than production in 2021/22 and the lowest since 2009/10.
US producers increased their cotton acreage by 11% this season to 5.05m hectares. But, with the drought becoming more severe over the last couple of months, the USDA expects that the harvested area will no exceed 2.89m ha. The abandonment of 43%, if confirmed, will be by far the highest since USDA records began in 1960. This explains, along with a minor cut in the estimated yield, the significantly lower forecast announced last week. Although the USDA has also cut consumption to accommodate lower production in the US supply and demand table, the agency is expecting 2022/23 ending stocks of 392k tonnes, about half the size of those estimated for 2021/22 and also the lowest since 1960.
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More Room for Brazilian Export
But what does Brazil have to do with lower US cotton production? A lot: First of all, Brazil is the world’s second largest cotton exporter, after the US. In its August supply and demand report, the USDA did not raise its forecast for Brazilian exports in 2021/22, the crop being harvested now, or for 2022/23 exports, the crop for which will be planted from December, because the USDA is assuming weaker global demand and imports due to an expected economic slowdown. However, with the possibility of consumption being higher than expected in the coming months, and considering the very tight stocks projected for the US, Brazil will probably have room to increase its share of world exports.
Reinventing the Brazilian Cotton
Brazilian cotton production has an interesting history and has developed in recent years in close conjunction with the expansion in soybeans. Brazil has been producing cotton since the 18th Century and assumed a significant role in global exports at the beginning of the 1860s, during the US Civil War. After that, when US production returned to normal, the Brazilian cotton industry went through a series of ups and downs until it suffered a severe blow in the early 1990s, when the government facilitated the entry of imported textiles into what had been an extremely protected market.
Unable to compete with imports, Brazilian textile production fell as did cotton plantings and production, which hit a historic low in 1996/97. At that point, however, Brazil was already beginning a profound change that, in the following decade, would transform both the geography and the basis of its cotton production.
Heading to Central Brazil
In the 1990/91 crop, when Brazil produced 717k tonnes of cotton, the states of Paraná (South) and São Paulo (Southeast) dominated production, representing 48% and 17% of the total, respectively, followed by Bahia (6%) and Mato Grosso (5%). Ten years later, in the 2000/01 crop, when production had risen to 939k tonnes (three times 1996/97’s), Mato Grosso (Center-West) was already accounting for 57% of production, followed by neighbouring Goiás (12%), Mato Grosso do Sul (7%) and Bahia (7%), while São Paulo and Paraná fell to 5% each. Now in the 2021/22 crop, the harvesting of which is on the final stretch, Mato Grosso is the origin of 71% of the 2.737m tonnes produced in Brazil, while Bahia (Northeast) produced 20%, leaving São Paulo and Paraná with 0.5% and 0.1%.
Higher Yields
What happened over the past three decades was not just a change in the map, but also a transformation based on economy of scale and technology to raise both productivity and quality. In the 1990/91 crop, the average yield in Brazil was 363 kg a hectare, compared with 711 kg in the US. Ten years later, Brazil’s yield was already at 1,101 kg/ha, while the US was stuck on 709 kg. In the 2021/22 season, the Brazilian crop yielded an average of 1,633 kg/ha, well ahead of the 918 kg harvested in the US.
While establishing itself as a major world producer and exporter, Brazil also won, a case at the World Trade Organization in which the US was ordered to limit subsidies to cotton producers and pay compensation of USD 300 million to Brazil and other cotton-producing countries that were judged to have been harmed by US subsidies.
Following Soybeans and “Safrinha” Success
It is not by chance that the revival of Brazilian cotton production was led in the 1990s by the state of Mato Grosso, the country’s largest soybean producer. In addition to being agronomically welcome for crop rotation, cotton has very high production costs, making it more suited to the large-scale production model already in place for soybeans in Mato Grosso. In addition, cotton’s higher added value made exports possible despite the huge logistical costs involved in transporting Mato Grosso’s production to Brazilian industrial centres and to the port of Santos, 2k kilometres away.
More recently, following the success of “safrinha” corn production, which is planted right after the soybean harvest, cotton has no longer had to fought for area with soybeans in the summer crop season. Currently, almost 90% of the 1.1m hectares cultivated with cotton in Mato Grosso is planted in January and early February, after the soybean harvest. It is the “safrinha” cotton.
In Bahia, where the new production model gained momentum from the mid-2000s onwards, farmers are prevented from growing cotton as a second crop, after soybeans, for weather and crop calendar reasons. Nevertheless, cotton has become a key component of the production model led by soybeans, in a state where big farms and high tech are also the rule.
With a Little Help from the Crop Calendar
The world’s number two exporter, behind the US and ahead of India and Australia, Brazil has the advantage of starting its cotton planting season in December, when the corresponding crop has already been harvested in the US and India, and when Australia is finishing sowing. As a result, Brazilian producers have more time to make their planting decisions based on the impact of the US crop on international prices.
Keeping Both Eyes on Prices for 2023
In May, cotton prices hit their highest since 2011 on ICE, only to fall sharply in the following 60 days, pressured by the risk aversion caused by inflation and the economic slowdown, and also by diminishing prospects for cotton consumption around the world. December 2022 futures fell from a high of USD 1.3379 a pound hit on 17 May to USD 0.8254/lb on 15 July down 38% in two months. After that, the market began to react, in a movement crowned on 12 Aug by the USDA’s cut to its US production estimate, which took December 2022 futures to USD 1.0859/lb, the highest since June.
For Brazilian producers, however, who have already sold about 70% of their 2021/22 production, the priority now is to plan for the next crop, which means keeping both eyes on the July 2023 and December 2023 contracts. In mid-July, when December 2023 futures stumbled below USD 0.70/lb, producers became really concerned, and the recent rebound to USD 0.90/lb has not secured yet a larger planted area in the 2022/23 season, whose potential production is about 30% sold, according to AgRural.
COTTON ICE-NY Dec 2023 Futures – Daily Chart
But, if the weather remains unfavourable in the US (which, in addition to the drought, still has to face the hurricane season during the maturation and harvesting of its 2022/23 crop), a slight increase in Brazil’s cotton area will be possible, especially in Mato Grosso, where cotton and soybeans do not compete for the same space. Therefore, and with potential growth in demand, Brazil may grow its market share, although the US should continue to be at the top of list of the world’s main exporters.
