If you think cotton prices are headed higher, think about selling physical cotton and buying it back on the board rather than waiting out the market, says Kelli Merritt, Lubbock, Texas cotton farmer, broker and merchant, speaking at the Ag Market Network’s November conference call.
Merritt’s advice is based on significant uncertainty in the world cotton marketplace coupled with the possibility of some bullish news from India and China.
“We’re waiting to see if India is going to be exporting enough cotton to be a constant competition to the U.S. crop,” Merritt said. “We’ve heard rumors that USDA has over-estimated their stocks by as much as 3 million to 5 million bales.”
In addition, “The Cotton Corporation of India has announced they are going to buy 27 percent more local cotton than in the past three years. We in the trade keep anticipating that India is going to dump all this cotton and keep prices suppressed, but the evidence seems to be mounting that they’re not going to do that. If they actually export substantially less cotton, it will give the market some support.
“The other big elephant in the room is China. So far this year, they’ve bought roughly 10 million bales and they’re still steady buyers. We don’t have a grasp of how long this will continue. It’s nice now while it’s happening, but who knows when it will stop. If it stops suddenly, that could really take the breath out of this market.”
More possible bullish news is China’s purported plans to start subsidizing food crops instead of cotton, “and that’s going to change everything,” Merritt said. “Much is being written that this is the year they’re going to do that, and once they get all the cotton they want in the reserves, they will totally focus on food crops, and leave cotton.”
Merritt noted that many of China’s textile mills are closing and moving to other parts of Asia, resulting in increased export sales to those countries as well as an increase in yarn imports back to China.
“Some of this seems to be cyclical changes in the industry that occur over time,” Merritt said. “There is cheaper labor in these developing countries so the industry shifts to where the cheaper labor is, like it did when it shifted from the United States to China.
“Hopefully some of these adjustments will result in more demand for cotton yarns and we will see cotton gradually win back some market share that they lost to man-made fibers during the price volatility of 2011.”
Spinner margins are also improving, according to Merritt. “The price run-up in 2010 hurt spinners. They thought there was no end in sight to high yarn prices, so the high cotton prices didn’t bother them. But after the selloff, there they were with inventory that they had invested huge input costs in, and they couldn’t sell it for (the right price). The market is finally starting to come back to them.”
Demand for U.S. cotton picking up
Demand for U.S. cotton has picked up recently, especially for high quality cotton, Merritt says. Importers have been looking to Texas, which has been averaging nearly 36 in staple length along with good color grades this harvest.
Here’s where the uncertainty starts to come in, according to Merritt. “Once this immediate demand for cotton is filled, we will likely see this nice basis start to weaken. If cotton producers are waiting for prices to go up, sell physical cotton while you have a strong basis. You can buy it back on the board if you’re optimistic that prices are going up. It can get really tricky to hold cotton into the spring waiting on higher prices. If the basis weakens, and you’ve spent money on storage, you’re going to have to see this market move up several cents just to get you back to the price you can get today.”
Texas cotton producers will be moving to more grain in 2013, noted Texas A&M Extension professor emeritus Carl Anderson. “The big question mark is that we’ve been through a period of dry weather, so wheat farmers are having difficulty in some areas getting their crop up to a stand. The interest is there to plant more wheat in wheat country – the Rolling Plains and up through the Panhandle.
“Producers wanting to plant corn “have a little time, but we really need some moisture this winter to get next year’s crop growing, especially for the dryland crop.”
Anderson says a reduction in Texas cotton acreage of around 30 percent in 2013 “would cut acreage substantially in the United States in 2013. But it looks like we’re still going to have a good supply of cotton. We have to remember. We have only 10 percent to 15 percent of the world’s acreage now. So what we do is not going to make much difference in the world market. It’s what India and China are going to do. China has supplies equal to their current spinning demand.
“The best thing farmers can do now is decide what crop to plant, and where they can fix some prices. We’re going to have bigger crops of corn, grain sorghum and wheat if we can get some rain, so prices are going to be under great pressure to go down.”
Meanwhile cotton prices seem to have found a home at around 70 cents, but could head higher on rallies. Those rallies aren’t likely to last long, analysts think.
While prices at that level aren’t above breakeven for many farmers, “if that’s what the market gives, we have to take it,” Merritt said. “We can’t sit and wait for some pie-in-the-sky number that we may not reach.”
The analysts say the cost of spreads and other marketing strategies are at reasonable levels today. “When December 2012 is at 76-78 cents, you need to be marketing,” Merritt said. “We might see December 2012 go to 80 cents. There’s going to be a lot of resistance at 78 cents for December 2013. It could go to 80 cents and above, but you should start marketing cotton at around 78 cents.”