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COTTON SPIN: Unfolding Uncertainty in U.S. Cotton Outlook

For growers with un-contracted, un-hedged cotton, I suggest paying close attention to the markets with any eye towards taking a short futures position if December ’14 rallies back 80 cents.

The month of June marks another set of USDA forecasts of supply and demand variables for 2014 crops.  For cotton, the report represented a bit of readjustment to the fundamental picture.  Back in May, USDA’s first comprehensive forecast was for a smaller U.S. crop below 15 million bales. Based on that report, and the tighter ending stocks that it implied, I was inclined to raise my price outlook at least a nickel. For example, I was thinking December ’14 cotton futures might trade between 75 cents on the low end and perhaps over 85 cents on the high end.

Well, longer term forecasts are always subject to a lot of uncertainty.  Starting around Memorial Day weekend, and in subsequent rain events, the Texas cotton has gotten off to a much better start than anybody would have previously expected. This is especially true in areas with extensive dryland acreage and later planting dates, like the Rolling Plains and South Plains.

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  What does this mean?  Nothing for certain, as there is still a long time left before harvest.  However, the surface moisture at least creates the possibility of more production. This year in particular, establishing stands of West Texas cotton would allow for any late summer El Niño moisture to influence yield. 


USDA reduces abandonment estimate

These possibilities apparently led USDA to reduce their expected abandonment and increase forecasted production by a half million bales in the June supply/demand report. Net of some other tinkering, the end result of the June report was U.S. ending stocks being raised from 3.9 million to 4.3 million bales. That change leads me to yet another price readjustment, this time down two or three cents. I would now expect the December ’14 cotton contract to trade between about 72 cents and 82 cents per pound.

The normal seasonal pattern would be to see futures prices trending toward the lower end of that price range starting in about July (see Figure 1). That is because we still have some time in the near term for adjustments in our expectations for acreage (i.e., USDA’s June 30 Planted Acreage report), crop condition, weather in general and El Niño moisture in particular. But as we move into late summer, the market will be able to better size up just how much we will be adding to ending stocks.

For growers with un-contracted, un-hedged cotton, I suggest paying close attention to the markets with any eye towards taking a short futures position if December ’14 rallies back 80 cents. The safest and most flexible way (but not the cheapest way) of taking a short futures position is by purchasing put options on Dec’14 cotton futures.  Put options have been relatively inexpensive this year due to low volatility, so it is something worth shopping for. Especially during this mid-summer period when there is still some uncertainty premium left in this market.


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