Trouble in U.S. and world financial markets is weighing on the cotton market, according to market analysts speaking at the Ag Market Network’s September teleconference.

“I almost feel like we are discussing a financial Armageddon this morning,” said Mike Stevens, an analyst with Swiss Financial Services. Stevens was referring to the day before when Wall Street recorded its largest one-day drop since the Sept. 11 terrorist attacks, as several mega-financial companies began to falter in the wake of bad mortgage loans, a falling housing market and credit problems.

Lehman Brothers Holdings filed for bankruptcy protection and Merrill Lynch Co. Inc., agreed to be purchased by Bank of America Corp. The giant insurer American International Group, was looking for some type of rescue package.

The cascading failures are sure to have an impact on the commodity markets, according to Stevens. “After some of the most ballyhooed commodity bull markets in recent history, all of the major indexes went into negative territory yesterday. Goldman Sachs is now down 0.2 percent on the year.

“The fear is that consumer confidence is going into the tank, which will force everyone to get their erasers out concerning the demand side of the cotton equation. We have mega crop problems popping up here in the United States and nobody seems to care anything about it because of the fear on the demand side.”

According to Stevens, one sign of trouble was when cotton prices easily broke through resistance levels. “Fundamentally, most of the cotton trade thought that global demand would step to the plate at 70 cents to 67 cents. The market’s sharp drop through those levels without a pickup in export demand has shaken confidence greatly.

“Now traders and mills are forced to wait for another shoe to drop. Greatly exacerbating the problem is the fact that demand from China has contracted more sharply than anyone expected. Their crops are obviously much bigger that anyone anticipated.”

But the news on demand is not all bad, Stevens says. “Remember, the demand has been chased off by a fear of the unknown. But that demand is still there, and it will come in and support the cotton market very quickly once the confidence returns.”

When that happens, the cotton market is likely to return to fundamentals for determining cotton prices. While long-term fundamentals are positive, there are definitely some short-term issues to work through, noted Carl Anderson, Extension specialist, professor emeritus, Texas A&M University.

“A large supply of cotton hanging over the market helped push December 2008 futures from about 82 cents in mid-June to about 64 cents in mid-September, an 18-cent drop, or nearly $100 a bale. Hopefully, at these lower prices, we cure low prices by stimulating use and encouraging production.”

USDA’s Sept. 12 world agricultural supply and demand estimates were also bearish for cotton, showing lower consumption and higher ending stocks.

Export sales and shipments “have been weaker than expected,” Anderson said. “Since our market is dependent upon exports, we’re now waiting to see how low these prices will go before buying will start. We could see some sizable export sales overnight, and that would certainly be a positive for the market.”

Another bearish piece of news was USDA’s increasing its estimate of Chinese cotton production by 1 million bales to 37 million bales, after starting the season off at around 33 million bales.

China is still in the market for cotton, however. “China’s cotton use is now projected at 53 million bales, so they have a 16-million bale gap between production and consumption,” Anderson said. “They will need a sizable amount of cotton unless they use up their stocks. I doubt they want to get extremely low on stocks.”

Anderson added that low cotton prices in China are encouraging mills to buy locally. Meanwhile, time is fleeting for U.S. cotton prices to rise high enough to encourage farmers to plant more cotton next year. “If prices don’t improve soon, I definitely think we will see fewer acres planted next year.”

That means that planted acreage in the United States will have dropped three times in a row. “Stocks could draw down and really get tight next year,” Anderson said. “I’m still optimistic that the future holds higher prices. Currently, we have too much supply of cotton against a very unstable economy in the United States and in the rest of the world too.”

Fifty-seven cents is a popular downside target for cotton, according to Stevens. “Once some stability returns, I think you will see a return to fundamentals in cotton to the 67 cent area. Then we can set up a trading range of 67 cents to 74 cents.

“I’m still bullish on cotton December 2010,” said O.A. Cleveland, professor emeritus, Mississippi State University. “I believe we will get back into the high 60s. I don’t know that we can get 70 cents again unless we have some crop difficulties.”

These are very unstable times for cotton said, Pat McClatchy, executive vice-president of the Ag Market Network. “We’re not just trading cotton, we’re trading companies and crude oil, which makes it difficult to get a grasp on what we want to do. But as some point, the markets will stabilize and we should see the market’s responding to fundamentals from these low levels.”

e-mail: erobinson@farmpress.com