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Fundamentals — higher cotton prices

Cotton farmers will do well not to wait on 85-cent cotton to price a good portion of their 2010 crop. In fact, they probably should be aggressively pricing at 75 cents, says O.A. Cleveland, cotton marketing specialist and professor emeritus, Mississippi State University.

Cleveland, speaking at the recent Bayer CropSciences 2010 Southwest Cotton Technology Seminar in San Antonio, Texas, said cotton prices could hit 80 cents. “But it’s hard to see how we can get to 85 cents.”

He said prices have “excellent support at 69 cents. I don’t think it will go below that and at 78 cents to 79 cents we see some pretty good overhead resistance.”

He said price range for the 2010 crop likely would hold between 69 cents and 79 cents, and mostly at 74 cents and higher. “You know how much it costs to grow cotton and to harvest it, so if you see some profit at 69 cents you might sell some, not the whole farm. But when cotton gets to 75 cents you need to get aggressive.”

Cleveland said nearby futures are trending higher than longer futures. “Mills are in a considerable shortage and need cotton now,” he said. If that demand holds, he expects price will attract more acres.

Part of the reason for improved cotton prices is an improving economy, although “we’re not out of the woods yet,” Cleveland said. He said strong consumption numbers from China, Viet Nam and Bangladesh point to a better year for cotton.

“The U.S. domestic off-take is also stronger than expected,” he said. “We will take stocks down more in 2010, not just in the United States but worldwide.”

He said a 16 million-bale U.S. crop could mean a 3.3 million-bale ending stocks. The stocks to use ratio is 21 percent, a figure he said in the past has meant dollar cotton. “I’m not predicting that,” he said.

But supply and demand fundamentals support better cotton prices. Global consumption the last four years has been high and production has not been equal to that increase. Mills had to tap carryover stocks to make up the difference. “The world needs more U.S. cotton, but farmers will not produce more without better prices.”

He said China remains the catalyst. “China is the big boy since increasing production in 2000.” China switched gears last year. “They began to worry about the food cycle, increased grain acreage and cut back on cotton.”

Cleveland said China produces about 35 million bales of cotton annually and consumes 45 million. “That leaves a 10 million-bale market.”

Increased production worldwide this year will help fill some gaps, but not enough, Cleveland said, to make production exceed consumption. He anticipates a 10 percent increase in global cotton production in 2010. The United States will increase by 12 percent, led by Texas producers. He anticipates Texas adding 500,000 bales to 2009 production level.

Much of Texas is cotton country, he said. “West Texas is made for cotton. Even in dryland areas, cotton is the best option.” He said winter rains across most of the Southwest also will encourage cotton acreage.

He expects the Southeast to increase as well but says Mississippi may waiver between cotton and soybeans with bean prices still high. He said much of the Delta will plant more cotton as they remember grain harvest problems last year and recall the times cotton saved them.

He said California and Arizona expect acreage increases, as well. “And if we see prices above 78 cents, we’ll see more cotton.”

Cleveland said India, the second largest cotton producer, typically grows 25 million to 27 million bales annually and he expects production to be up this year. Significant production increases, however, may not be likely. India’s recent production improvements came from adoption of transgenic cotton, especially Bt varieties, and Indian farmers have put that technology to work on about all their productive acres.

Even with improved production, increased acreage and favorable weather, Cleveland doesn’t expect worldwide cotton production to hit 100 million bales any time soon. He said ending stocks from the 2009 marketing year, which ends in July 2010, will show a significant drop. “That tells us we should expect higher prices. As ending stocks go down, prices go up.”

He said the combination of improving fundamentals, with consumption still exceeding production and world ending stocks coming down, encourages higher prices. He said the value of the dollar also favors higher cotton prices. “When the dollar goes down, cotton prices go up; when the dollar goes up, cotton prices go down.”

Cleveland said some of the money investors took out of the stock market and invested in commodities will go back to stocks, taking some of the volatility out of commodity prices. “But we’ve had a volatile market since January and we will still see some volatility as we get the 2010 crop in the ground.”

Cleveland said other commodities will continue to compete for acreage. “But it’s a great time to plant cotton.”


TAGS: Cotton
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