The world will reverse a two-year trend toward smaller cotton stocks this coming year, which could push U.S. cotton prices toward the 50- to 60-cent level at harvest, according to Texas A&M University Extension economist Carl Anderson.
Anderson, speaking on the March Ag Market Network teleconference, added that producers should expect quite a bit of volatility in a market that is restructuring. “We have to treat this market very carefully — tighten up our strategy, protect our price, but don't take any big risk in the market itself.”
Anderson described the March 10 USDA supply/demand report — which reduced the estimate of world old crop ending stocks by 760,000 bales — as bullish. The United States was responsible for 700,000 bales of the reduction.
“That leaves the United States with tight stocks of 3.55 million bales. Domestic use was raised to 6.3 million bales and exports were increased 600,000 bales to 13.6 million bales.
“The fact that world stocks have dropped a little over 15 million bales the past two years is providing support, keeping prices in the 67- to 70-cent range since last October.”
But things will change soon, according to Anderson, with the forecast that world production will exceed consumption this coming year, which will start a trend of increasing stocks.
It's no surprise that China will be the most important factor determining the direction of U.S. cotton prices in 2004, noted Anderson. “The numbers, for now, indicate a substantial increase in China's cotton acreage, 12 to 16 percent. That's a 28-million to 30-million-bale potential for Chinese production, compared to 22.4 million for the old crop.”
Anderson is forecasting a 29-million-bale crop for China in 2004-05, against a use of 32 million bales creating a 3-million-bale shortfall. “That's quite a bit less than last year's 9-million-bale shortfall and the first signal that they may not be aggressive buyers of our new crop.”
USDA also re-estimated China's cotton use for 2003-04, increasing consumption one million bales, to 31.5 million bales, while increasing imports of old crop 500,000 bales to 8.5 million bales. “While these numbers are thought out very carefully, remember we are dealing with a major country where a little change can be a million bales,” said Anderson.
Meanwhile, higher soybean and corn prices could draw U.S. cotton acreage back slightly from earlier estimates, to 14 million to 14.5 million acres, according to Anderson.
The economist estimates an 18-million-bale U.S. crop on 14.2 million acres. “Optimistically, we might use 6.4 million bales and export 12 million bales, for a total use of 18.4 million bales and a carryover of 3.1 million bales,” he said. “That would take stocks down from this year, but remember, we're not the price setters. The price setters in the world is mainland China.”
December futures prices considering these fundamentals — particularly the expected 4-million-bale increase in world stocks — could dip to the 50- to 60-cent range by harvest, according to Anderson. “If the United States makes a 19-million-bale crop, that's when the futures price could slip to the 50-cent level. That's what I'm going to build my pricing strategies on today.”
An optimistic outlook for prices could occur if the U.S. crop drops to 17 million bales and China's to 27 million bales. “Then December might hang up around toward the 60-cent range. But I don't think the world market can handle real high prices of 75 to 80 cents.”
In the short-term, Anderson believes December futures might recover to the 68- to 69-cent range. “I think there will be a little more support in the market from now to mid-June. The June 30 acreage report could be a market mover. An acreage report of less than 14 million acres could be very bullish.”
Cotton market speculators are slightly bullish currently, noted Anderson. “The speculative position is slightly on the long side, around 1.27 million bales long, compared to 5.1 million bales long last October when the price went over 80 cents. So the speculators are important, but this time, they can move either way and when they do, they will move the market.”
Anderson expects a volatile market this year. “It's going to move faster, perhaps 10-cent moves in two weeks every once in a while. Of course, that's both an opportunity and something to be careful with.
“Buying puts always is a good strategy if you can get in early enough or if you can get in with a low-enough cost,” Anderson added. “We might see 62-or 64-cent puts in the 2- to 2.5-cent range in the next couple of months.
“I don't think you want to use a put strategy in this market that would leave a net price (less the premium) lower than 60 cents,” Anderson said. “Go for a strategy for the downside that gives us a floor on the board at 60 cents or higher. But that would be difficult to do today (March 12) with a 62-cent put at 3 cents.”
This market will likely go down from where it is now,” Anderson said. “Most likely, it's going to peak out this spring, relative to this fall unless there is another weather disaster of the magnitude of 4 million to 5 million bales less than what the world is expecting.”