Cotton analysts have softened on earlier predictions that December 2009 cotton prices could reach a dollar or more, due to a market that just doesn't seem to want to move higher.
USDA added to the lower price expectations on Feb. 8 when it increased estimates for world production and decreased estimates of world use for old crop cotton.
“That combination of lower use and bigger supplies increased world stocks by 2.58 million bales and bumped the world stocks-to-use ratio up to 45 percent. This indicates we don't have a lot of market support to go up,” Carl Anderson, Texas A&M professor Extension specialist emeritus, said at the Ag Market Network's Feb. 12 teleconference.
At the same time, USDA increased estimated 2007-08 foreign stocks (world stocks minus U.S. stocks) by 2.28 million bales over January with nearly all of the increase coming from exporting countries. “Export nation stocks went up, foreign stocks went up and Chinese and U.S. stocks went up. Most importantly, the Chinese crop for this current season increased 1 million bales, while its use decreased by 1 million bales.”
The result is decreased U.S. export market potential, according to Anderson. “We're expecting that exports will not do as well as we had hoped. They've been dragging, averaging 200,000 bales per week. We need to export 275,000 bales weekly to reach the USDA forecast of 15.7 million bales.”
Lower prices in the near term may help some, according to Anderson. “March futures have already backed off some, and I think they will continue to lag. We also have a high level of certificated stocks, and that usually will hold the market down to more of a supply and demand relationship, in the neighborhood of 65 to 67 cents.
“If we lose momentum in March, producer equities are going to remain weak. With carryover climbing to 9 million bales, equities will be based on technical moves. Don't give up on your equities if you have cotton in the loan. There will be days when the market will make some good rallies.”
Anderson noted that the National Cotton Council's annual cotton planting survey indicated that in early January, U.S. producers intended to plant 9.5 million acres of cotton in 2008. That would produce a 15.4-million-bale crop, assuming average yields.
“But we have to remember that planted acreage could be less than 9.5 million acres,” Anderson said. “I believe it's going to be closer to 9.3 million acres, which trims the crop down to 14 million bales.”
Much attention will be focused on Texas this season, where over half of U.S. cotton is expected to be grown. Since two-thirds of that crop is dryland, the state could lose significant acreage due to drought or another weather problem. “At this time, we are simply short on subsoil moisture around the Lubbock region,” Anderson said. “However, all we need are a few good rains up until May. But it does leave us with a lot of volatility in the future of our market.”
If U.S. cotton producers make the crop they're supposed to make, foreign countries buy what they're supposed to buy, and the domestic cotton industry uses up to 5 million bales, U.S. carryover for new crop cotton could drop to 4 million bales.
“That constitutes a pipeline supply of cotton, and we should see higher prices in December 2009 futures. For 2009, we need to plant 10 million acres of cotton, provided that foreign production continues to lag use.”
Softening demand, however, could be a huge wet blanket, Anderson says. “If the United States heads into a recession or slowdown, cotton goods sales will slow down considerably, which will work its way back to China and they won't need as much cotton.”
On the supply side globally, “India has found new varieties and they will be increasing their production much faster than they increase their textile use. Brazil's cotton crop is off to a good start, with expected production of around 7 million bales. They use about 4 million bales, so they'll have some to export.”
Anderson says growers should watch technical rallies closely. “If December 2008 futures reach 80 to 85 cents, I would consider that an excellent rally based on the supply and demand fundamentals of today. Consider buying a put option at 5 cents out of the money. At 80-cent futures, find a strike price of 75 cents at 3 cents to 3.5 cents. That would give you a floor and the top would be open.
“You can combine that strategy with selling a call 10 cents higher than the market is trading at the time. So on Feb. 11, you could have sold a 90-cent call for 1.94 cents, with a net outlay (buying the put and selling the call) of less than 2 cents. You would have a floor in the market of close to 70 cents and a ceiling of around 90 cents.”
Anderson said the market seems resigned to the fact that the United States is simply going to produce more grain this year.
That could have an adverse impact on cotton yields, according to O.A. Cleveland professor emeritus, Mississippi State University. He believes that USDA's production estimate for the 2008 cotton crop might be high considering how much true cotton land could come out of production in favor of grains.
“The true cotton land has a base yield of 1,000 pounds to 1,400 pounds per acre. When farmers start thinking of soybeans at 80 bushels an acre, the risk of cotton versus soybeans, and the fertilizer price, it's a lock that much of this cotton land is going to be in beans.
“This takes down our average yield, so I come up with a crop on the lower end, as low as 14 million bales. I would take the carryover down to about 3.5 million bales.
“In the short-term, the market is not going to do much. Still I remain very bullish with respect to December 2008 and December 2009 futures. I think we'll see 90-cent cotton in December 2009, but I don't know if we'll get to a dollar or not. As Yogi Berra said, ‘Prediction is difficult, especially when it's about the future.’ But I'm still bullish on this market once we get past the planting season.”