Demand for the 2013 U.S. cotton crop remains strong because of its high quality, which has helped push nearby futures prices close to 90 cents a pound. But old crop futures prices don’t seem to be pulling new crop prices along with it.
That, plus an anticipated greater supply of cotton in 2014-15, is why cotton market analysts speaking at Ag Market Network’s February conference call say new crop cotton may offer the best prices at planting, as the market looks to attract cotton acres.
John Robinson, Extension economist, cotton marketing at Texas A&M, Robinson said U.S. cotton acreage is not likely to shift far from the National Cotton Council’s recent survey of cotton producers, which indicated plantings for 2014 of 11.27 million acres.
16- million bale crop
Robinson says 11 million acres of cotton would likely produce a 16-million bale crop. With 3 million bales of carryover from 2013, domestic use in 2014-15 of about 3.5 million bales and exports of around 9 million bales, U.S. ending stocks would climb to about 6 million bales next year, pushing the stocks-to-use ratio higher.
That’s why new crop prices in the United States are having difficulty following old crop higher. “A high stocks-to-use ratio is usually associated with price weakness,” Robinson said. “In my mind it takes away the fundamental case for any rally or strength, long-term for prices. We’re in a somewhat neutral to cautiously bearish outlook for prices. I’m guessing that December 2014 is going to spend most of its time between 73 cents and 83 cents.”
Uncertainty over what China will do with 45 million bales in a government stockpile, plus several million bales of cotton stored elsewhere in the country, is also concerning.
“That goes to our export number and ultimately to our bottom line,” Robinson said. “Most everybody is expecting some level of pull down of the China stockpile, which means they’re using more of their bales and not using quite as many bales from the rest of the world. Or not as much as exporting countries would like to see them use.”
There is some additional downside risk, which Robinson says could push prices 10 cents below his 73-83 cent range, should China’s drawdown be more than what people are expecting. “The market would react negatively to that fundamentally. The index funds and the hedge funds, who are still net long, would probably downshift their positions, which would result in even more selling, which would result in the market overshooting to the downside.”
Robinson added that China’s announcement that it is moving from stockpiling cotton to some type of target price/deficiency payment approach to support its cotton producers, complicates what they might do with the stockpile.
Carl Anderson, Extension professor emeritus, Texas A&M suggest that growers “think about marketing cotton year round. We should watch the first half of this year, March April and May, for any rallies we see with the typical planting season. The second half of this year, we’re probably looking at lower prices. We have plenty of supply in the world including China.”
U.S. cotton exports for 2013-14 have a long, uncertain hill to climb, Anderson says. “The United States has shipped about 4.4 million bales of old crop cotton, which leaves about 6 million bales to ship in six months, which is 1 million bales a month, a fair amount of shipments. It can be done so long as there is a taker on the other end. Exports are the key.”
Watch for spring rallies
Anderson says to look for a possible rally in December 2014 futures above 80 cents to as much as 82 cents. “You have to decide if you want to fix prices above 80 cents if that happens. Typically when you have an increase in supply, the price during planting season will be supportive, and weather scares could temporarily push December 2014 over 80 cents. But I wouldn’t get hung up on that. If we haven’t seen 80 cents on December 2014 by April, you might have to settle for fixing the price in the high 70s.”
Anderson suggests moving old crop cotton whenever nearly futures prices are around 87 cents “even though it’s not impossible for the market to go little higher. I would consider selling old crop and watching closely for opportunities in new crop.”
Kelli Merritt, cotton producer, broker and merchant from west Texas, sees a range of 82-89 cents for old crop cotton. “I think we could see that break out higher, but I don’t think that it’s going to happen right now. In new crop, the tighter range is 75-80 cents. We could possibly see 82 cents. At 82 cents, I would certainly want to be hedging. We could see a downside for new crop of as low as 70 cents. We may also be headed toward a weaker dollar, which is typically supportive of commodity prices.”
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