With old crop U.S. cotton carryover expected to reach almost 10 million bales, the largest since 1966, two factors are crucial in the coming months for cotton prices — export sales to China and U.S. planted acreage.
That makes June and July important months to watch, according to speakers at the Ag Market Network's June 13 teleconference. On June 11, USDA's supply and demand estimate lowered U.S. exports for old crop cotton to 13 million bales and subsequently raised carryover to 9.8 million bales, the largest in 40 years.
“We have a lot of cotton in the United States looking for a home. Most of it has been pulled out of the loan program and is in private hands ready to export,” said Carl Anderson, professor Extension specialist emeritus, Texas A&M University.
Anderson says currently there is plenty of cotton in foreign countries to meet market needs. USDA made an upward revision of 500,000 bales in world carryover, making the total around 56.4 million bales, compared to last year's 56.6 million bales.
Fundamentals look better for new crop cotton with the United States still holding a lot of cotton, but the world less.
In March, USDA projected U.S. cotton plantings at a little over 12 million acres. “If 91 percent of that is harvested and we use an 800-pound average yield, we would have an 18-million bale crop. An 850-pound yield would give us a 19-million bale crop. We suspect the acreage will be a little less than 12 million acres,” Anderson said.
“If we have 11.5 million acres and 91 percent harvest percentage, an 800-pound yield would give us a 17-million bale crop, while a 850-pound yield would give us 18.5 million bales. The likelihood of the new crop is around 18 million bales to 19 million bales. USDA is calling it at 18.8 million bales. I don't have a problem with that until something happens and we find out the crop acreage is not as good as we were thinking.”
Adding in an almost 10-million bale carryover makes for a plentiful supply of cotton in 2007-08, noted Anderson. “USDA is currently using 6.7 million bales for (new crop) ending stocks. So there is not a shortage of cotton in the United States based on the numbers we're looking at right now.”
Fundamentals outside the United States for 2007-08 look positive for price, according to Anderson. “Estimated production is 97 million bales, and estimated use is 123 million bales, leaving a 25 million-bale gap. Even though these numbers are on the optimistic side, it's still a big gap.
“We are counting on not having as much foreign competition in getting rid of our surplus this coming year. This fact may already be in the market with the 5-cent rally we had last month. It also puts us in a situation where the A-Index will continue to climb. We could see the December challenge the 60-cent range down the road.”
Another bullish factor in the market is that speculators have turned positive, according to Anderson. “It's a gradual turn, that's the way they do it. So we have a number of things that are supportive under this market for the new year, which could bring prices up a little farther. I don't expect runaway prices, 60 cents December is a big hurdle to jump.”
Anderson also noted that seasonal price fluctuations don't seem to apply in this market. “This is an export-driven market, with index funds trading on top of it. You can look at the grain markets and see wheat prices extremely high at harvest time, and we don't have a bad crop in the United States. So we can easily have prices that are out of sync with the tradition of low prices at harvest and higher prices as we move away from harvest.
“Hopefully, we will see December 2008 having to buy a few acres next spring. Then we could see a rally. When fixing a price on new crop, I don't think that window is open yet, and we will have to wait until we get on down the road.”
Mike Stevens, Swiss Financial Services, Mandeville, La., believes the current rally in cotton prices, “while still considered mostly technical, definitely has its roots in the fundamentals. Offering prices on the world market are going up, much to the chagrin of mills, which have had it their way for a long time with their hand-to-mouth buying.
“Since the blending period for the adjusted world price began, the AWP (used to determine the LDP) has risen from 40.12 cents on May 17 to 46.78 on June 12, and the LDP has dropped from 11.88 per pound to 5.22 cents per pound.
“It's also important that the China Cotton Index, which is based on prices being offered to the Chinese mills, has been rising since the middle of May. They realize now that the bottom is in and they're having to pay more, and they are accepting that.”
Stevens says fundamental long-term bullish factors “are a smaller U.S. crop and the prospects for some big sales to China before new crop starts to move.
“We'll have a whole new set of fundamentals to work with this fall and right now, we need to make sales to China before their new crop starts to move. You can't count on them going back to the buying patterns of buying a million bales at a time. Their policies have been to look after their producers and keep their internal prices stable and they've done that through the careful issuance of buying quotas. But as soon as their new crop is available, our window of opportunity starts to close very quickly.”