The running of the bulls in Pamplona, Spain is not for the faint of heart. Then again, neither is the U.S. cotton market, which has been heating up recently on news of world production shortages and very strong demand.

For example, a rally on Tuesday, Aug. 10, was credited to increasingly widespread publicity over flooding problems in Pakistan. On Thursday, Aug. 12, USDA’s World Agricultural Supply and Demand Estimates conservatively pegged the losses in Pakistan at 700,000 bales. This contributed to a sharp reduction in world carryout and also gave strength to the market.

In the United States, prices are high, yield potential is respectable, export prospects could top 15 million bales and demand is strong. It’s almost enough to induce a thin smile from producers.

But it’s been a while since the day when forecasting prices consisted of determining how much cotton there was in the world, figuring out how many folks wanted to buy it, subtracting the difference and extrapolating price.

Today, cotton runs down a frenetic path, shoulder to shoulder with unfamiliar friends — big oil, commodity funds, the global economy and policies that can change the scene in a blink.

As exciting as the prospects for prices may seem — some cotton analysts don’t have a problem predicting that cotton could push upwards of 89 cents — there is a downside risk to this market.

Mike Stevens, with Swiss Financial Services has a hunch the market may be entering a dangerous period “that could possibly inflict pain similar to March 2008,” when a significant price correction caught many completely off guard.

“As of last night (Aug. 12), December cotton was up over a dime in just the last two and a half weeks,” Stevens said. “During this time, open interest has grown by over 36,000 contracts as speculators flipped from net short to net long and the commercial industry hedged a very large crop.

“Any way you look at it, for the investing and speculating public, there is an agricultural bull market going on, and it is attracting significant amounts of money with no end in sight yet.”

Everyone loves a bull market, notes Stevens. “But history tells us that more often than not, if an early season rally gets out of hand, we wind up having to deal with much sharper corrections that are considerably more difficult to deal with. At some time in the next few months the pipeline will begin to refill, and prices will level off.”

High cotton prices will also attract more acres worldwide. To support prices above 80 cents, Stevens says the economy has to remain stable. “Any major falter in the global economies, and we could conceivably have to deal with falling price in the first quarter of 2011.”

When you’re running with bulls, it pays to keep your eyes open.

e-mail: [email protected]