U.S. acreage will be down without question, but price support due to weather concerns began to unravel even prior to the USDA May report.

Texas and the Southeast both began receiving rain and improved early season moisture and prices had slipped to the 83-cent level even before the disastrous events that started on May 10. Eased moisture concerns coupled with the bearish 2012-13 numbers finally pushed prices over the cliff.

Price Outlook: I have thought and said all along I thought the “pessimistic outlook” on price was 80 cents. Growers were encouraged to take protection at 90 cents or better on as much of the 2012 crop as they felt comfortable taking.

Based on continued weak demand, growing stocks, and now possibly improved drought outlook, the pessimistic scenario has played out — but it’s much earlier than anticipated and even more negative on price.

The big questions right now are 1) Where’s the bottom? and 2) Is there a chance for improvement and if so how much?

Some are saying the bottom could eventually be 60 cents but I’m not willing to be that pessimistic yet. It would be hard to argue against an eventual 65-cent level, however. I’m hoping we can settle in at around 70 cents for now and even see some eventual improvement from that level — back to at least the 75 to 78-cent level.

If prices do show improvement, it’s likely the improvement may be limited. With current weak demand world stocks projected to grow to such a burdensome level, the only significant positive driver on price right now is weather. And with supply/demand where it is, there’s such a huge potential supply cushion out there (stocks) that the world will be less sensitive to U.S. acreage and weather. Any rally to near 80 may be asking too much.

Marketing and other decision-making: Having said all this, what does a grower do? I think much depends on how much of the 2012 crop the grower already has protected in some form. Let’s try to think through a few options.

Put options: A Put Option NTM (near the money) right now is going to cost around 5 cents. If the market does go all the way to 60 cents, you make 10 cents and net 5 cents gain for 5 cents invested. If you’re that pessimistic and are already contracted to the point of not being comfortable doing any more, then Puts might not be a bad choice for the most pessimistic grower. If you did go the Put route, would it be better to still wait for a rally first?

Loan: But a 70-cent strike price minus 5 cents gets you 65 cents floor, basis the cash market. Depending on your basis, how far does that place you above the loan?

If your expected basis is 4 cents under, you’re at 61 cents compared to 52 cents + gain or equity through the loan. Would you rather take your chances through the loan and hope for a rally into 2013?

Contract: You could contract more now or wait on a rally before adding to contract sales.

One very important consideration — with the decline in price and should we stay here or go lower, a grower with revenue crop insurance at the 70 percent level or higher is already below the revenue guarantee depending on how the APH compares to the farm’s actual yield potential and what actual yield ends up being. Growers with revenue protection can take some comfort in knowing they have the minimum/preliminary guarantee.

Parting thoughts/comments: If prices remain this low into the 2013 crop year, we’ll see a big reduction in cotton acres in 2013 if corn, soybean and peanut prices remain relatively more attractive. We saw this in 2007 through 2010. If prices remain at these levels into 2013, it will also be an interesting first year test of what will be the new farm bill safety net.

Read more at http://commodities.caes.uga.edu/fieldcrops/cotton/.