Kelli Merritt, a marketing consultant with CropMark in Lamesa, Texas, was not surprised to see cotton prices decline from the near-record levels of last March. But the depth to which they fell was unexpected.
“I still thought into the summer that a 68-cent 70-cent bottom was going to hold. Once we broke through to 60, I was sure that would hold it. When it broke from there I concluded that it was because of the global economic problems. Mills have quit buying cotton. There is so little interest right now, because buyers are having to reassess their situations to see how bad it’s going to get.”
That said, with volatility calmer in the cotton market this fall, “some are buying the market, now,” Merritt said. “But I’m still not convinced we’ve seen the bottom.”
Those getting into the market now “are trying to hedge counter-cyclical payments, according to Merritt. “Or they are selling cotton and want to buy it back on the board and are getting long because they believe that between now and July, cotton is going to go up 10 to 15 cents to maybe 65 cents at the most.”
Merritt says cotton price movement prior to planting “is going to be determined by what the grains do. Cotton is definitely not going to go out there and lead whatsoever. If we see the grains, and especially corn, really have a nice move up, we can see cotton have a nice move up.”
The best outlook for cotton is likely to occur longer-term. “I hate to keep saying we’re one year away from (higher cotton prices), but we could be one and possibly two years away. It’s going to be determined by how long and how severe this recession is.”
Mid-South cotton economist O.A. Cleveland, writing in his Nov. 7 newsletter, agreed. “The cotton market is looking at a 12-month to 24-month state of ‘depression’ before it can break out of the current price slide, i.e., before the possibility of a 60-cent market returns.
“Typically, it should take only one growing season for production and/or consumption to react to a severe price shock. Yet, the severity of the current shock will likely take between one and two crop cycles to realign cotton supply and demand.”
Merritt says given today’s market troubles, it’s difficult to pinpoint a solid marketing strategy for a producer. “A lot of strategy is based on how producers feel about risk and the market. Some people are very convinced that we at the bottom now, and they’re willing to take on some risk. But there are others who are convinced it can go lower.”
Merritt suggests if you want to buy the market, “buy the July 2009, 50-cent call and sell the 60-cent call. As of today, you can do that for about 228 points. Maximum potential for this trade is 772 points, but there is no margin call potential.”
As for pricing the 2009 cotton crop, Merritt suggests keeping a close eye on the market for run-ups. “If we do have a routine 20-cent run-up, we need to be ready to buy puts or something to get short the market. I don’t think we can expect to get much above that this year. It does seem like a very old story, but once again, we are looking at another year that does not hold much potential for prices very far above loan.”
Merritt says the cost of hedging cotton counter-cyclical payments with options “is more inexpensive than it’s been in a while because of reduced volatility. But what we used to call cheap really doesn’t exist and what we call cheap now is medium-priced.”
During a time of low cotton prices, cotton producers should take advantage of every opportunity to add cents to the bottom line. In that vein, Merritt, Pat McClatchy with the Ag Market Network’s, and cotton merchant Angie Goodman have formed a subsidiary company to handle cash cotton in hopes of cashing in on high quality.
“There are two things we’re trying to do,” Merritt said. “We want to go grower-direct to the mills, and we’re trying to get a premium for the cotton, which is Certified FiberMax. We think the market is ready for a niche market like that.”
On a trip to China in October, Merritt says, “We had a real good response from (mills) there. They know their demand for cotton is down this year, and while this is happening, they are rethinking their industry.
“One of the things being said over and over is that China wants to go to a value-added product, a higher end product. When I told them what we were doing, they were very responsive and said if we could provide them with a consistent supply of the higher quality cotton grown in Texas, they were definitely interested in hearing more. So I’m optimistic we can do some good things there.”
This fits in with what a lot of market experts have been saying about U.S. cotton for years, noted Merritt. “Growers need to know where their cotton is going and to be aware that they are growing cotton specifically for a customer rather that growing as much of something as they can and letting someone else worry about marketing. We have to be more proactive in our marketing.
“As growers, we’re missing the mark by not taking advantage. In Texas, we used to have the low quality product. They realize that we in Texas are now growing a higher quality product that can compete with the San Joaquin Valley product. Now that the SJV is growing less and less of it, we felt like the timing was perfect to step in take some of that market share.”