Back in September when December 2010 cotton futures inched over a dollar a pound, a collective gasp of surprise and excitement swept across the Cotton Belt. As it turned out, we hadn’t seen anything yet.
On Feb. 17, the cotton market again took the cotton industry’s breath away when May 2011 cotton futures rose by the Intercontinental Exchange limit of 7 cents to a record $2.0193 a pound. The March 2011 contract closed at $2.0402. Market analyst Mike Stevens, Mandeville, La., pointed out that cotton options “went up another 7 cents. So synthetically, you’d have to put another 700 points on top of May.
Stevens says $2 cotton looks good on paper, but in reality almost every bale in the world at this time is either sold or spoken for. “We’re not trading cotton. We’re trading chalk marks.”
While $2 cotton is a historic level, rapidly rising cotton prices as of late are probably doing more harm than good, according to Stevens.
“This includes producers who marketed their cotton wisely from 80 cents to a dollar; merchants, who’ve hedged cotton and are having to send margin money to New York; and the mills who bought cotton on call, which is setting a basis and fixing the price on dips, because the market hasn’t dipped.”
Stevens also noted that some west Texas cotton producers whose production came up short of expectation had to scramble to acquire cotton to fulfill contracts.
No end in sight
The high price levels of 2010-11, “makes March 2008, (when rising cotton futures caught many merchants in a margins squeeze) look like grade school stuff. That was a short-term situation. There’s no end in sight this time. Volatility is probably going to increase. Once we finish this blow off stage, we will fall, and at some point, after it’s wiped out a lot of folks, it’s going to come back the other way.”
One bright side of the historic run up is that it’s offering cotton producers opportunities to book new crop cotton at extremely high levels. “These are great opportunities to do partial marketing,” Stevens. “It could very well go higher in new crop.”
According to market analyst O.A. Cleveland, the news behind the high prices is China’s insatiable appetite for cotton.
“My first impression is the Chinese domestic consumption is considerably higher than the USDA estimate (about 48 million bales). The Chinese continue to buy cotton backed up by what we know to be a very strong, and rapidly growing, middle class. Apparently, their textile mill ‘demise’ isn’t as has been reported. They’re now probably looking at 51 million to 52 million bales being consumed. That demand is just incredible.”
Lending support to this is the fact that U.S. domestic consumption — even with these high prices — is on track to reach above last year’s level.
Cleveland says that cotton has finally caught up with the grain revolution. “The excess cotton supplies we saw in 2007 — record world supplies — have now been depleted due to reduced plantings. Now, cotton will continue to compete aggressively for acres and try to match whatever grains do.”
Cleveland agrees with Stevens in that bull markets can cause just as much stress as a bear market can.
“Certainly, the industry has never seen margin requirements this large. The trade has educated the banking industry as to the margin requirements that could be necessary — but was underestimated. The grain bankers have (dealt with it), so this situation isn’t entirely new. True, it is new to the cotton industry but not the overall agricultural industry.”
High cotton prices could push plantings to the 13-million acre mark, according to Cleveland. “Growers will be a little slower to return to cotton. Their biggest concern is whether cotton will be competitive next year? That’s the right question to ask and the answer is absolutely, it will.”
Cleveland noted that on Feb. 17, a cotton producer “could go to the board and hedge his next three crops — 2011, 2012, 2013 — and have an average futures price of $1.14. Back that off to cash and it’ll be approximately between $1.05 and $1.09. Farmers have a lot of decisions to make.”