The bull market in cotton could last for at least another 18 months, given a widening foreign production deficit, concern over global acres, and the need to restock supplies of raw cotton, said Jarral Neeper, president of Calcot, and featured speaker at the Ag Market Network’s March teleconference.
The growing foreign production deficit was reaffirmed in March when USDA raised the estimated deficit in old crop cotton by 600,000 bales to 22.4 million bales. Production deficits were raised for China, Turkey and Vietnam.
In another surprise, estimated U.S. domestic consumption for 2009-10 was raised 100,000 bales. “Demand has been very good as the retail sector struggles to refill the pipeline that was almost emptied out after the near economic meltdown,” Neeper said.
However, market bulls were disappointed that USDA didn’t lower 2009-10 Chinese production any more than it did (it lowered production by 500,000 bales to 31.5 million bales). Neeper said, “Here recently, the National Bureau of Statistics released a crop production estimate for China of 29.5 million bales. If that’s accurate it would indicate that USDA has another 2 million bales to go.”
This possible shortage is reinforced by dramatically rising domestic prices in China, “in spite of the fact that in early December, China issued their WTO-mandated quotas a month early,” Neeper said. “Two tariff rate quotas of 900,000 tons and 1 million tons have been issued, and China has indicated that if this doesn’t stop prices from rising, it would issue another million tons of quota in April. So we really have to wonder how large their crop is.”
Neeper said global consumption of cotton “has been very good, not only in China but everywhere around the Asian subcontinent.”
Despite the optimistic USDA report, old crop cotton futures worked lower in early March, “because the USDA numbers were fully priced into the market already,” Neeper said.
One problem is that high prices tend to scare off buyers, according to Neeper.
“We had clearly started to outpace the prices of our foreign competitors by a good margin. So it’s not surprising that U.S. prices needed to come back down. The question is whether or not this is just part of a normal correction, and we move much higher from here, or if have more to go on the downside.”
Neeper feels that prices might need to move lower. “Business and inquiries are starting to pick up (at lower prices). But to do a big volume of sales, we need to move lower. But I don’t think the market is going to fall out of bed by any means.”
Neeper says it’s very apparent that foreign mills “are not well covered into the summer months. Of course, they’re complaining about cotton prices right now. They’re spinning cheaper cotton purchased in late December and early January.”
Neeper says these mills have not fully priced the effects of higher prices into their yarns “and they’re not sure how the people downstream are going to accept it. There is a lot of price resistance. Whether that results in real resistance, and this market stops dead in its tracks remains to be seen.”
Price levels necessary to encourage adequate cotton acres in the United States are a big concern in new crop, according to Neeper. “At 75 cents on the December contract, clearly that works for a lot of producers. Growers are interested in these price levels. But is it enough to get acres large enough to service the demand next year?”
Part of that question will be answered by the growing season, according to Neeper. “What the market can’t price is yield, and that’s the big question mark as we move forward. We may get just enough acres and if Mother Nature is kind, prices won’t get too explosive on the upside. However, if we have any kind of a disaster like we had last year with drought and rain, then the imagination is the limit.”
In any case, it could take a while to rebuild stocks to comfortable levels, Neeper says. With tighter stocks in the United States and around the world, “it’s going to take a while to replenish supplies worldwide. For this crop year, probably 2011 and possibly 2012, we’re going to get back to cotton futures in a 65 cent to 85 cent trading range, with occasional spikes up or down.”
Neeper says that as prices get to the upper end of this trading range, it’s a good opportunity for growers to price cotton, and when we move to the lower end of the trading range, growers ought to be looking at opportunities to price in some calls to take advantage of prices moving back to the upper end of the trading range.”
While the size of the new crop in the United States and the world is still a long way from certainty, “for the first time in a long time, things are shaping up to be quite positive for U.S. growers for 18 months to 36 months down the road,” Neeper said.