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Cotton futures could show some life due to Chinese quality issues, falling oil prices

JOHN ROBINSON Extension marketing specialist with Texas AampM University visits with George M Knapek program director for representative farms at Texas AampM39s Agricultural and Food Policy Center and Bill Thompson Extension agricultural economist with Texas AgriLife during the Cotton Economics and Marketing Conference at the Beltwide Cotton Conferences in San Antonio
<p>JOHN ROBINSON, Extension marketing specialist with Texas A&amp;M University, visits with George M. Knapek, program director for representative farms at Texas A&amp;M&#39;s Agricultural and Food Policy Center, and Bill Thompson, Extension agricultural economist with Texas AgriLife, during the Cotton Economics and Marketing Conference at the Beltwide Cotton Conferences in San Antonio.</p>
&ldquo;Some have said my projections are far too high, even excessively high,&rdquo; he said. &ldquo;That being said I need to set my oars in the water at a little bit different angle to go the opposite way. That&rsquo;s because everybody is working downstream so hard, and I&rsquo;m going to go upstream.&rdquo;

New-crop cotton futures should trade in the neighborhood of 65 cents per pound and could go as high as 68 cents during the 2015 planting season, a veteran marketing observer said at the Beltwide Cotton Conferences.

Dr. O.A. Cleveland, professor emeritus at Mississippi State University, acknowledged he was more optimistic than some observers when he gave that prediction during the Cotton Economic Outlook Symposium, which has become a fixture at the Beltwide, held this year in San Antonio, Texas.

“Some have said my projections are far too high, even excessively high,” he said. “That being said I need to set my oars in the water at a little bit different angle to go the opposite way. That’s because everybody is working downstream so hard, and I’m going to go upstream.”

Dr. Cleveland also acknowledged that most of the prices being talked about on the eve of the 2015 season are below the cost of production for many of the nation’s cotton growers.

“Initially, you know, of course, the acreage will be down because of price,” he noted. “At the same time, you know corn prices are down, grain sorghum prices are down so the great big, huge step we’ve got to take in 2015 is to find a profit in row-crop agriculture.”

Early forecasts are saying U.S. cotton plantings could fall by at least 10 percent from 2014’s 11.01 million acres. Bloomberg and other media surveys have put planting intentions at 9.7 million acres, while Informa Economics is forecasting 9.4 million acres. The National Cotton Council will issue its early-season planting estimate at its annual meeting in February.

“The only crop that is not forecast to be down is marijuana so you might want to take a look at that crop, depending on which state you’re in,” Cleveland noted. “In some states, of course, you can get 10 years for growing that crop.”

The lower prices are also being felt in other cotton-producing countries. Cleveland says he believes the world will see a reduction of a minimum of 10 percent in plantings, “recognizing that it is the job of the market to bring this production down because our supply is so excessive.”

The Mato Grosso area of Brazil, one of that country’s major producing areas, could be down by as much as 12 percent to 12.5 percent. “Some of my associates there say acreage in other states will be down but not as much as they had anticipated,” he noted. “They’ve had some seed problems and water problems.”

Australia’s cotton acreage is down as much as 45 percent this year, primarily because of water availability. “If they don’t get water for their 2015 crop, the crop they will harvest in 2016, they will be down another 50 percent for this coming year,” he said. “That is a long way out to be talking about their water situation, but they are in a world of hurt right now.”

Dr. Cleveland is projecting cotton plantings in China to be down 13 percent because of the uncertainty surrounding China’s cotton policies. Price is not as much of an issue in China with the government supporting prices at the equivalent of $1.46 per pound, but China’s huge reserves of cotton may lead the government to de-emphasize cotton production.

World crop down

With acreage being reduced around the world, Dr. Cleveland is projecting the 2015-2016 world crop at between 106 million and 108 million bales. That could put world production more on a par with consumption – if consumers do their part.

“With oil prices coming down consumers will have more money in their pockets, and that tends to be very positive for cotton,” he said. “We’re seeing the same effects in all of Asia with respect to the impact of falling oil prices and consumer income. It’s giving the consumer more money, it’s giving the government more money, and it’s providing a more stable situation for governments and consumers.

“The only thing that bothers me so far is housing starts are a bit weak. They are improving, but there is a much closer correlation between housing starts and cotton demand than the general economy and cotton demand.”

Dr. Cleveland acknowledged the December USDA World Agricultural Supply and Demand Estimates report lowered the consumption forecasts in major importing countries like China, India, Turkey and Pakistan.

“I think what we will see is those projections reversed in all of those countries in the report that comes out next week (week of Jan. 12),” he said. “I think they will be increased back to their original level prior to December and, in many cases will be increased.”

China’s consumption potential continues to be a mystery, given the nearly 60 million bales it is believed to be holding in its reserves and the shifting of yarn production from China to countries with cheaper wages.

Disaster in waiting

“The idea is that China is a recipe for disaster or a disaster waiting to happen,” he said, referring to the focus on the reported size of China’s cotton reserves. “We have been far too slow to recognize the quality problems they have with those stocks.

“They are releasing stocks from their reserves, and the textile mills are finding they are having trouble running some of those bales. Yet they run them in yarn, and they find apparel folks are not liking the yarn. There are too many problems, too much contamination in the cotton they didn’t realize was there.”

As a result, the Chinese mills will need U.S., Indian, Australian or Brazilian cotton to mix with the cotton that has been sitting in warehouses or in the open for five or six years to produce an acceptable product.

“They (the Chinese government) had initially said they were not going to acquire any more cotton than their minimum WTO requirements,” said Cleveland. “Then they said ‘we’re in a free market economy, we’re going to let the market decide, but we’re going to check in March.” Now they’ve said they’re going to check every week to see if we need to let more cotton come in.”

Cleveland cited other developments such as the market recently breaking a long-term downtrend line and the commodity index funds indicating they will again be active in 2015 as positive for cotton futures.

“So I tend to think this market is headed back up to the 65-cent to 68-cent level in the May or July contract,” he said. “I don’t think that if we head up to 65 cents we will stay there. It will bounce up and bounce back and bounce up and bounce back.

“If you have cotton in storage, I don’t see any reason to hold physical cotton. If you have a decent basis, take the price and replace it with a call option.”

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