When the cotton market fails to respond positively to tight stocks, strong exports and other bullish fundamentals, there's one dubious conclusion, according to Mike Stevens, a market analyst with Swiss Financial Services.

“We have a market that's in trouble.”

Stevens said during the Ag Market Network's April teleconference that clouds may have started to gather over the cotton market on one of the brightest months in recent memory, last October, “when we ran to 86 cents.”

“I think a lot of damage was done by the market over-extending itself,” Stevens said. “It was probably a combination of some panic buying out of China during that period, and as merchants rolled short options up. We're still paying for that sin.”

Since then, the market has fallen 27 cents, noted Stevens. “The last six weeks have been particularly cruel to us, with a 16-cent break, while corn and beans have been enjoying one of their better runs in many years.”

The most recent price break occurred when the market failed to respond to a strong export figure the first week in April. “It made the specs nervous,” Stevens said. “When prices slipped yesterday (April 12) a major Memphis merchant jumped into the market to protect himself. That shoved the market below the (previous) lows of a week before last and took us out of that trading range.

“For a while, that made U.S. cotton the cheapest cotton in the world and obviously business started occurring because we didn't stay limit down,” Stevens said. “But we still closed in bad shape. I don't think you can say we're in a bottom on this market yet, but at least we're closer to a bottom than a top.”

On the other hand, the tight stocks still add some fragility to the market and could tip prices in either direction, according to Stevens.

The October runup put many foreign buyers on a hand-to-mouth purchasing basis, nonetheless, exports of raw cotton have been very good, added Stevens. “As a matter of fact, we have oversold this crop by some 800,000 bales. We have to think realistically now that we are not going to have weeks of big sales.”

A big cloud hanging over the market is an oversupply of Mid-South and Southeast type cottons, according to Stevens. Fixing this problem could be the biggest challenge the cotton industry will have faced in a long time.

“For 40 years, we supplied our domestic mills with the type of cotton that our contract called for,” Stevens said. “That time has passed. Our domestic mills are in a decline and will probably never come close to where they were five years ago. And now the cotton grown for the contract — 33s and 34s — is in over-supply.”

The problem is that the world market is calling for a longer fiber of 35 and 36 staple. “So the 33s and 34s have gone begging and found a home in the futures market that gives a premium to the middlings and strict middlings at 34 staple.

The discrepancy between what the world wants and what U.S. growers are encouraged to grow “is really weighing on this contract.”

O.A. Cleveland, professor emeritus, Mississippi State University, noted during the teleconference that the CCC loan schedule “is telling us we need to grow discounted cotton. With two out of three bales now going overseas, that's got to change. It's going to be difficult from a tradition standpoint, but that's exactly where we're headed. We've got to step out and take a leadership role and get that done.”

Another piece of shaky news for the cotton market is that China textile mills are less than optimistic about their prospects for the coming year.

According to a recent survey, one-third of the 180 mills indicated they reduced yarn output during the first quarter of this year. It's taken the market a while to buy into the prospect as cotton demand was so strong for so long.

China is still staying the hand-to-mouth supply course, according to Stevens, “but have indicated they are changing their product signature to use more polyester. It's hard to understand how synthetics could be cheaper with energy prices where they are.

“But if we can get the Chinese interested in coming in and buying some of this 34 cotton, we can put some fundamental legs under the market. But until we do that it's going to hang over the market.”

Growers should strive to protect themselves in a volatile market, according to Texas A&M Extension economist Carl Anderson. “The possibility of tight stocks could run the market back up, “but it's still hard to find the hard data to back it up. I favor out-of-the-money puts on December 04. The idea is to not spend over 2.5 cents to 3 cents for a put option at 62 to 63 cents. I'd like to keep the net above 60 cents December.

“Also with the farm program, when the price goes down, your counter-cyclical goes up. The neat thing is that if you have puts, and you make a few cents on a put, that would really help cash flow, especially in a farm program that doesn't cover every bale you produce.

“We have a market that is very forward-looking,” Anderson said. “We are going to build stocks, and following usual patterns, we will drop into the mid-50s, unless something happens fundamentally in the world to keep us from having a 100 million bale crop.”

e-mail: erobinson@primediabusiness.com