October 14, 2009

5 Min Read

Extremes of weather throughout the growing and harvest seasons have prompted USDA to lower projections for the 2009 U.S. cotton crop. This could buoy cotton prices a bit this fall and next spring, although ample world supplies still hang over the market.

USDA lowered 2009 U.S. cotton production by 3.3 percent, to 13 million bales in its Oct. 9 Crop Production Report. Texas accounts for most of the decline, although production in the Mid-South was reduced 85,000 bales.

The big news was the reduction of the Texas cotton crop by 400,000 bales, noted Carl Anderson, Extension professor emeritus, Texas A&M University, speaking with a panel of analysts at the Ag Market Network’s October teleconference. “We’ve pointed out for a long time that the Texas crop is subject to dry, hot weather and early freezes.

“There is a lot of uncertainty on how small this crop is going to be. Everything points to it being somewhat smaller than 13 million bales, perhaps to 12.8 million bales.”

“USDA tends to do things incrementally,” added John Robinson, Extension economist at Texas A&M. “It makes me wonder if there is some more trimming coming. I don’t think USDA has touched the yield impact from the deluges we’ve seen in the Mid-South.”

Anderson noted that while world carryover continues to decline, “as of today, we’re still going to carry over about six months of use worldwide, which is fully adequate, a little on the surplus side. About four and a half months would give the market some upside.”

USDA raised crop production for India, another big competitor of the United States, to 24.25 million bales. India’s domestic use is estimated to be around 18.5 million bales, “which leaves them with plenty of cotton to export, and a carryover of 10 million bales,” Anderson said. “All in all, we are decreasing in carryover supplies, but we still have plenty of cotton that is available to the market.”

While the 2009-10 Chinese crop was reduced a million bales, USDA is still estimating Chinese ending stocks of 17 million bales.

Anderson said marketing alternatives for growers “are heavily dominated by going to the loan and waiting for market moves to pick up some equities along the way. Farmers will have to pay storage and handling costs.

“As we move into a new market with lots of volatility, we’re seeing a lot of producers opting to go with marketing association pools and using the futures market to enhance their market. That’s worked well, and we have a lot of producers holding calls out into July 2010.”

The bottom for cotton has moved higher in recent months, noted Mike Stevens, with Swiss Financial Services. “Back in July, we were talking about 55-cent bottoms. The next month, we were talking about 57-cent bottoms. Last month, we were talking about 60-cent bottoms. Now looking at the charts, you could easily see a 62-cent bottom.”

Stevens noted that the last three moves in the market “have been 6-cent to 10-cent moves. At the current bottom of 60 cents, you could take that up to 66 cents on the high side. Right now, we’re not trading cotton futures. We’re trading weather, setbacks in the crop, gold, the U.S. dollar and other factors. I would sure hold calls and call spreads on the market. I would use any dips to get established because we are going higher.”

O.A. Cleveland, professor emeritus, Mississippi State University, doesn’t believe that 66 cents “will hold this market. I don’t know whether we’ll be able to break or hold above 70 cents, simply because of the consumer. The demand side of this price equation is extremely weak. Everything is coming from the supply side.”

Prices could work higher in 2010, according to the panel.

December 2010 cotton futures prices trading at 71 cents in early October “is a good indication that prices are going to work their way up,” Anderson said. “As we look at 2010 and next planting season, I think December 2010 could easily trade around 75 cents and bump 80 cents at times.”

“When you get cotton prices to 75 cents and above, you’re going to attract a lot of cotton in the world,” Stevens said. “I would use very conservative put spreads out there to lock in something. My gut feeling is that 75 cents to 80 cents next year will probably look pretty good. Try to design something where you don’t tie up a lot of capital. And you sure don’t want to fool with margin calls out to 2010.”

Cleveland says 75 cents “is a hard top. I’m overly concerned with the demand side. Unless we get some more supply side problems, I don’t see a lot of upside potential for 2010. Yes, we can take it up to 75 cents, and money can still come into the market. I’m not comfortable with getting prices above 75 cents, other than for a day or two.”

USDA also lowered domestic mill use in its Oct. 9 World Agricultural Supply and Demand Estimates, reflecting the continued sluggish pace of U.S. textile exports. Exports of cotton remain unchanged at 10.5 million bales for the marketing year.

U.S. ending stocks were reduced 200,000 bales to 5.4 million bales. The forecast for the marketing-year average price received by producers was reduced 2 cents per pound at the top of the range to 49 to 57 cents.

World beginning stocks for 2009-10 were raised 1 million bales, reflecting higher stocks in China.

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