Interpretation of USDA's Aug supply and demand report on cotton

In USDA Aug supply and demand report, 2024/25 global cotton production and exports are forecast lower, while consumption is forecast higher, and for 2025/26 season, cotton production, imports and exports are forecast lower, so ICE cotton futures market rebounds obviously. 2025/26 U.S. cotton production is forecast lower. Planted area is lowered 8 percent to 9.3 million acres based on the NASS August Crop Production report. Harvested area is reduced 15 percent to 7.4 million acres as dryness in the Southwest raises the expected national abandonment rate from 14 percent to 21 percent. The national average yield for 2025/26 is raised over 6 percent to 862 pounds per harvested acre as higher abandonment in the Southwest results in the harvest of fewer lower-yielding dryland acres.U.S. cotton production is estimated to reduce to 2.88 million tons, down 0.3 million tons from July forecast and down 0.26 million tons from 2024/25 season.

What is puzzling is that the August report significantly lowered the planting area compared with the assessment after the end of sowing at the end of June, and the areas in multiple producing regions were generally reduced. In contrast, the upward adjustment of the area in the June report was unexpected when compared with the pre-planting survey in March. In 2024, affected by the substantial increase in global cotton supply, cotton prices almost showed a one-sided downward trend. Around January, the ICE cotton futures hit a multi-year low, falling below the U.S. cotton planting cost. Therefore, most farmers held a pessimistic expectation for cotton planting in the new season, and their intention to plant cotton dropped sharply. During the cotton planting period from April to June, the drought situation in major producing areas and Texas was higher than the same period last year and the five-year average, leading to a decline in cotton planting in some drought-stricken areas. Therefore, before the release of the USDA planting area on June 30, most market views believed that the cotton planting area in the new season should only decrease rather than increase compared with the March cotton planting intention report. Looking back at analysts' views at that time, it was reasonable for the U.S. cotton planting area in the 2025 season to be between 9.3 million and 9.735 million acres. However, the USDA finally gave a surprising figure of 10.12 million acres. Despite the fact that most surveys in the past month or so showed that the U.S. cotton planting area was declining-because the production cost of cotton was higher, and after the price fell into the cost zone, some cotton farmers would switch to planting other crops.

However, there are also views that the shift from cotton to corn and peanut cultivation is unsustainable. Firstly, although cotton tends to yield higher economic benefits in normal years (though it fell below the cost this year), the invested ginning equipment is fixed assets that require a relatively long period to recover costs, making it difficult to completely abandon cotton. Secondly, corn is more dependent on water: cotton usually only needs rainfall for supplementation, while corn requires irrigation equipment. Therefore, for traditional cotton-growing areas (especially those with sandy soil), switching to corn cultivation carries risks. Thirdly, peanut crops require crop rotation to avoid diseases caused by continuous planting of peanuts in the same location. Thus, the decline in U.S. cotton planting area this season is in line with market rules, but it is also inappropriate to be overly bearish on the cotton planting area.

Furthermore, from the perspective of the cotton-grain price ratio, there is no possibility of a contrarian rebound in cotton planting area. During the U.S. cotton planting period from April to June, cotton prices fluctuated between 60-70cent/lb. In the same period, corn performed relatively well with its price center ranging from 440-500 cents per bushel; U.S. wheat prices oscillated between 506-594 cents per bushel; and U.S. soybean futures prices fluctuated in the range of 970-1080 cents per bushel. Prices moved in a low-range oscillation. In particular, crops like cotton and soybeans, which are highly dependent on exports to China, suffered a significant drop on April 2. Thus, the August planting report also showed a preference for corn, with both soybeans and cotton registering obvious declines in planting area.

Finally, analyzing from some non-market factors, cotton farming in the United States secures farmers' incomes through measures such as Marketing Assistance Loans, Loan Deficiency Payments, and the Stacked Income Protection Plan, aiming to boost farmers' enthusiasm for production-similar to China's target price subsidy for cotton. According to the updated agricultural insurance provisions in 2025, the reference price for seed cotton in 2025 has been raised from 37 to 42cent/lb. Tass Smith, Vice President of Producer Affairs at the National Cotton Council, stated that the reference price has been triggered in 35 out of the past 37 years, and estimated that under historical conditions, the average payment per acre is $141. From this perspective, the reduction in cotton planting area by growers will be even more limited.

Therefore, combining the views of some experts, the U.S. cotton planting area may be around 9.5 million acres, with a year-on-year decrease of approximately 15%. In terms of harvest, due to the lower drought levels and higher growth quality during this year's cotton growth stage, referring to the average abandonment rate of about 27% and the average yield of 883 pounds per acre in previous years, the final output would be 2.78 million tons. However, considering that this year's weather is better than the previous two years, the abandonment rate is expected to be lower and the yield higher than the average. Thus, the U.S. cotton output for the 2025/26 season may exceed 2.78 million tons, likely ranging between 2.78 million and 3 million tons. Hence, the revisions in the August report are quite reference-worthy.