The cotton market did its job well in the early 2000s, with low prices significantly reducing projected world production and ending stocks for 2002. Now the experts say it has another job — to get that lost production back in 2003.
“I think 2003 is really going to set the price level for cotton,” said Joe Nicosia, CEO, Allenberg Cotton Co., Memphis. Nicosia spoke at the recent Cotton Roundtable, an Internet event sponsored by the New York Board of Trade, the Ag Market Network and Farm Press Publications.
“The marketplace is going to focus on finding a price level that will return world cotton production to the 94 million to 96 million bale level,” said Nicosia. “Prices are going to have to go to a level to bring that back. If it's already done that, it's difficult to tell. We grew roughly 90 million bales when the market was 35 cents. Today, it's 55 cents in 2003 (2003 December futures).”
If a 55-cent price “doesn't result in the world planting enough acreage in 2003 to produce at least a 96 million bale crop, prices are going to have to go higher,” Nicosia said.
But don't rule out prices going in the tank again, according to Nicosia, who projects a price range of between 40 cents and 52 cents (and possibly higher) over the next 60 days. “There is so much uncertainty today in the marketplace. I wouldn't rule anything out. There is a high level of risk in the cotton market today. Expect high volatility.”
Nicosia advised cotton producers “Keep your cotton under the protection of the government program until things become clearer. However, do remember that we have an almost 18-million bale crop that's waiting until harvest to be hedged. When that does come, I do expect substantial hedge pressure coming into the market.”
Other panelists at the roundtable also offered their projections for a price range over the next two months.
“We have seen a wall of selling anytime we get above 49 cents,” said Jarral Neeper, assistant vice president, call pool operations and economist at Calcot. “If we get above 50 cents, we probably have a fair shot at 52 cents.
“Growers really don't have to sell right now,” he said. “It doesn't matter if we're at 35 cents or 55 cents at the futures market. Take the futures market price, your LDP for that day and you're going to be somewhere between 60 cents and 63 cents.
“But even if you don't want to sell, if you see a decent price to the upside, consider putting in a floor in the futures market.” Neeper sees a downside of 42-45 cents.
“The cotton market is very forward-looking and anticipatory,” said Texas A&M Extension economist Carl Anderson. “Depending on weather conditions, I think the market wants to push against 50 cents and if it does, then I think we have a 54-cent upside with some concern about weather here or in the world.
“On the downside, in September, if USDA estimates an 18-million bale crop, we're heading back down and I don't think 40-cents would hold it.”
“If you have purchased a call option and see the market rise, go ahead and take your profit if you have some profits in those calls,” Anderson said. “Either take it or reposition. At the same time, be downside protected. The best option there is a put option.
“Also looking back over the last 5-6 years, buying puts in November on December on 2003 might be something you want to consider. Usually options are reasonably priced in September, October and November for 12 months out.”
O.A. Cleveland, cotton marketing specialist and professor emeritus at Mississippi State University, sees a 43-cent December price on the bottom side and 53 cents to the topside. “I'm a bit bearish on this market. If we can get December over 50-54 cents, that's great, but I think it takes a weather phenomenon to do that. And we could see 40-cent cotton.”
Nicosia also offered a brief overview of the world's cotton-producing countries:
China — “It's our view that the crop is fine,” Nicosia said. “They were looking for a 21 percent drop in acreage. That's been revised to 13.5 percent. Because of the smaller acreage, they are having to draw down their stocks. Consumption is doing well.”
Nicosia noted that China could increase its cotton acreage next year by 2 million to 4.5 million bales at current price levels. The country is expected to import 2 million bales of U.S. cotton this year, he said.
India — “Cotton producers are looking for the resumption of the monsoons. We should watch that development and its impact on future prices.”
Brazil — “Agriculture is really starting to do well. The large devaluations in their currencies have made returns there very attractive. Acreage in both soybeans and cotton continue to expand.”
Australia — “Prices still look good even with the appreciation of their currency. However, they are in need of water. If they can get some rainfall and increase irrigation supplies, I expect that crop to come back substantially. If not, it's going to be held hostage to its water availability.”
Nicosia noted that the U.S. textile mills are recovering somewhat from their downturn, although “I don't see domestic consumption going back to levels of 3-5 years ago. I think a lot of the reduction in that industry is gone for good. Only a prolonged period of weaker dollar and a change in economic fundamentals around the world could bring that back into the United States.”
On the other hand, from a pricing standpoint “we're not paying much attention to it at this point,” Nicosia said.
A replay of the Cotton Roundtable is available on the NYBOT website, www.nybot.com.