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Corn+Soybean Digest

Early Cotton Marketing Comes Hard

Take action when December futures hit the high 60s Steve Lloyd hopes Carl Anderson's bullish long-range cotton forecast is on the money. It's the Texas A&M cotton marketing specialist's bearish short-term outlook that has Lloyd worried.

He's ready to lock in a mid- to high-60 floor price on some of his cotton when and if December futures reach that level this spring.

"I don't like to use options that much because of the premium charges," says the Floydada, TX, grower. "But since it may be the best alternative, I will likely use puts or forward contracts this spring when the opportunity is there."

Lloyd farms about 1,600 acres of irrigated and dryland cotton in a wheat-fallow rotation. After the summer drought and harvesttime cool, wet weather in 2000, he's ready for a normal year. "Anymore, we ask our-selves, `what is normal?' " says Lloyd, referring to several years of rough weather that have hampered cotton production in the region.

One thing that has remained steady is a cotton price that hasn't produced many hardy bottom lines. Anderson sees lower prices for most of 2001. He encourages growers to consider seasonal marketing opportunities when they occur.

Recent USDA production reports on China and other areas have Anderson and others concerned about low near-term prices. "Production estimates for China were increased by a substantial 2 million bales to 20 million," says Anderson. "And even though consumption was increased by 500,000 bales, foreign stocks still rose by a sizable 1.5 million bales ... as a result, the market is expected to continue weak."

With December futures prices hovering in the 60 range in late January, there was little potential for any loan deficiency payment relief for growers this year. With a West Texas regional basis of 8 under futures, prices were virtually at the loan rate of about 52/lb. But as in most years, springtime weather-related price spikes were expected to provide some immediate marketing opportunities.

"We're hopeful prices will hit 66-69 in April or June," says Anderson. "That's a good starting point for marketing."

Of course, each grower faces a different financial situation. The degree of risk growers are willing to take can vary. But when December prices hit the mid- to upper 60s, Anderson says growers should consider putting floors under some of their crops.

"They may want to buy 2 out-of-the-money put options, then sell calls that are 4-6 out of the money," says Anderson. "That will lower their cost of protection and give them a set price (that will likely be much higher than harvest prices)."

If growers aren't comfortable doing their own marketing, he suggests taking part in marketing pools or other programs in which professional marketers oversee pricing decisions. "Producers need to prepare and implement marketing plans that take advantage of market rallies," he says.

Besides his own marketing, Lloyd participates in the Plains Cotton Cooperative Association pool, which handled more than 600,000 bales for Texas and Oklahoma growers in 2000. But he takes advantage of additional marketing opportunities when they're available.

"I plan to market some cotton when it goes above 65," says Lloyd, who admits he's frustrated over U.S. farm policy and its inability to provide a safety net for growers.

"I'm tired of butting heads with China and the high subsidies on its cotton," he says. "I'm hoping for some sort of flexible fallow provision in our farm program to provide a higher loan rate if land is taken out of production."

Anderson says that higher production in the U.S. will likely keep pressure on prices this year. "Producers want to plant more cotton this spring," he says. "Low prices of alternative crops, favorable crop insurance provisions and expectations for increased exports are encouraging growers to plant cotton and maintain rotation patterns."

Higher production, says Anderson, will probably hold 2001 December futures to under 72 all year. "It will take higher grain and soybean prices and/or another weather-reduced crop to bring supply into balance with use to hold futures above 70," he says.

While the 2001 forecast is bleak, 2002's is bright. Anderson anticipates a smaller crop from China, which has built up its textile industry. "With that, I expect China to be a substantial buyer of U.S. cotton (next year)," he says, adding that exports to other buyers should also be strong because of higher consumption worldwide.

"I'm bullish on the long run, from the end of this year and into 2002."

Southeastern or West Texas droughts can cause immediate concerns about cotton prices. But the ultimate price growers receive for their crop will more than likely be determined by what happens around the world.

"The extent of China imports will be a very big factor in eventual price realization," National Cotton Council (NCC) economist Kent Lanclos told Soybean Digest at the council's recent annual convention in San Diego. "If you start seeing China import 3 million, maybe 4 million bales, that will certainly put some upward pressure on prices."

The other major factor on domestic prices is the world crop. "If some of these major producers (China, India, Pakistan, etc.,) start experiencing some production difficulties, that will also help support prices," says Lanclos. "Mill use will continue to strengthen, but I'm guessing that prices will be influenced more by China and the world crop."

In late winter, most analysts expected Chinese imports in the range of 2.5-3.5 million bales. Presuming the U.S. has adequate supplies, Lanclos and colleague Mark Lange indicated that the U.S. should be responsible for about 50% of any Chinese raw cotton imports.

"If that occurs, U.S. exports should reach the 8.5 million-bale mark," says Lange.

In its annual early year survey, NCC projected the 2001 U.S. crop at 18.5 million bales - and that U.S. mills would use 9.8 million bales.

Total U.S. cotton plantings are pegged at 15.9 million acres. If realized, the 15.67-million-acre projection for upland plantings would be the second-largest upland acreage since 1962, trailing only the 16.72 million acres in 1995.

The economists also note that the economic pressures on the U.S. textile industry are as severe as any faced in the early 1980s, when annual use fell to just 5.2 million bales.

With the potential impact of the Chinese market and other world production and consumption, says Lanclos, "effective trade policy is crucial to the ultimate survival of the U.S. textile industry."

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