Wonder why cotton analysts keep stressing the importance of managing price risk in today’s cotton market?  A good bit of it has to do with the international cotton market’s split personality. From one perspective, there is too much cotton. From another, too little.

Noted Extension professor emeritus Carl Anderson, speaking at the Ag Market Network’s February conference call, “We have a division in our international cotton market which we have not had in recent times. The international cotton market is divided into China and the rest of the world.”

The problem is that China currently holds half of the world’s carryover and uses one third of the world’s supply, while the rest of the world holds the other half of the world’s stocks, and uses two thirds of the world’s supply.

“It splits the world into two parts, one where China has surplus cotton hanging over the market, while the rest of world trades a tight supply. This has certainly supported our market prices here over the last few weeks,” Anderson said.

Recent prices at the time of this writing, 82.74 cents for March and 83.27 cents for December, “is a lot better than what we were seeing last fall.”

Anderson adds that the cotton market should strengthen somewhat as planting time nears. “If it’s really concerned about acreage in the United States, it needs to hold its higher price and maybe inch up a little higher.”

The National Cotton Council’s recent survey of U.S. cotton producers estimates 2013 acreage at somewhere the 9 million acre mark, compared to 12.4 million in 2012. “That’s about a 27 percent drop which is in line with our expectations,” Anderson said. “It’s also in line with our need to keep our supply from running away.”

Anderson says a 9 million acre planting would translate to a crop of around 13 million bales. “The smaller crop should satisfy demand without increasing carryover too much and help stabilize the price somewhere in the range of where we are now.”

But the world’s fuzzy fundamentals are worrisome, Anderson said.

“We are in a very high risk situation for our producers, given the makeup of what is fundamental and what is not fundamental. We’re trying to figure out whether outside factors are leading the market right now, or whether we have some real demand.”

Anderson noted that USDA recently pegged world ending stocks for 2012-13 at around 82 million bales, which has produced a very high stocks-to-use ratio. USDA also raised export prospects for the United States.

But things could get tighter in the future, Anderson said, due to increased competition from the Southern Hemisphere. “Brazil and Australia are expected to produce about 12.5 million bales for the market this spring. They are also projected to carry over almost 11 million bales.”

Anderson pointed out that as foreign production and use move toward a balance, “we have to be very price competitive as we look into the future.”

Anderson noted that the last time China rebalanced its oversupply of cotton, in 1996-1999, cotton prices dropped from 79 cents per pound to 53 cents per pound.

“This is what bothers me, and why I think developing a marketing plan is of utmost importance. Be prepared to take care of your risk in the marketplace.”

In bearish news from the use side, Anderson noted that China’s relatively high domestic cotton price “is reducing mill demand and increasing use of man-made fibers. We have a situation that is very bothersome in that China has a price above the world price, and they have a huge supply of man-made fibers.

“We don’t know how that’s going to play out. It does appear that the competition between natural fiber and man-made fiber is intense. As long as China has the price of cotton in their country well above the price of polyester, then we are going to see their mills, and some other mills around the world, spin higher blends of polyester and other man-made fibers.”

Anderson noted that with the U.S. cotton market “moving sideways between the high 70s and the mid 80s for both March and December futures, the question right now is, does the market have enough force to break through that resistance area at 84 cents, and push on through to 85 cents? That’s what we would all like to see, but it’s not a guarantee, and the market has really been sluggish over the last month trying to make it to 80 cents, much less get above 85 cents.

“We’ve also seen that as the market has made these higher prices, mills have backed off and mill demand has slowed. That’s going to be the key as to whether this market can make 85 cents or higher.

 “We also have a fair amount of cotton certified for delivery on the futures market. That is a very good thing in that it will help keep the real price of cotton in line with the futures price.”

Anderson said cotton producers “should take a close look at fixing some of their 2013 crop above 80 cents.”