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Funds continue to bully cotton fundamentals

Investors with little idea of cotton fundamentals continued to bully the cotton market into unheard of volatility and the biggest price swings in recent memory. The question for panelists at the Ag Market Network's March 13 teleconference, is when supply and demand will calm the tempest.

Right now, it's not happening, according to Carl Anderson, professor Extension specialist emeritus, Texas A&M University. “If it was, then why are cash prices well below futures prices. I still believe in market fundamentals. I do not think it's possible to change the economics of supply and demand over the long run.

“However, over the short-run, a lot of things can happen and we hope they're not severe enough to damage the entire marketing section of the U.S. cotton industry.”

Anderson noted fundamentals point to lower prices, especially for old crop cotton. Lagging export shipments led to USDA reducing U.S. raw cotton exports by a significant 1.2 million bales in its March 11 World Agricultural and Supply Estimates. That reduced expected exports from 15.7 million bales to 14.5 million bales, “and I wouldn't be surprised to see that decrease another 500,000 bales.”

Declining exports would push carryover to 9.4 million bales, or about six months of cotton offtake for the United States.

Fundamentally, “this means there is no shortage whatsoever of U.S. cotton,” Anderson said. “The world surplus is not much better, with USDA raising world carryover almost 2 million bales from February to March. Textile demand is weak and getting weaker. World stocks are also close to six months use.”

Anderson says the United States still appears ready to produce less cotton than last year, even with the run up in prices. “I doubt that 90-cent futures last week (March 3-7) bought many acres because not many people could lock in that 90 cents with a reasonably-priced option or contracts just dried up.”

Texas A&M Extension specialist John Robinson says usually one would expect the market to calm down after the spike in prices like the one that occurred in early March. But the market continued to have volatile aftershocks for several days.

“The funds are driving the market now because price is way beyond any fundamental rationale. We've been in this situation several times since 2006, where prices have taken off, then we come back down because there's no export demand.”

Mike Stevens an analyst with Swiss Financial Services, noted, “If we could get this market to consolidate, it would be Christmas in the spring. That is what this market is badly needing right now, some sort of a sideways movement for a while.”

Herman S. Kohlmeyer Jr., a New Orleans commodities broker, noted, “Although it's true that supply and demand hasn't been very helpful to anyone, and the market seems to ignore it, what it has been paying attention to is the supply and demand of money.

“For quite some time there has been growing interest in diversification for the portfolios of the major pension funds, not to speak of the spec pools, and more and more money has been flowing into our markets in what's now called an asset class. There are certainly many more people wanting to throw money in this direction against the market. So, we've had supply and demand working in a way that we're not used to seeing.

“I don't know when it stops. Anybody would be forgiven for saying that the $1.10 in the May contract a few days ago would be the high for the next five years, but I don't like that bet. We're seeing something we've never seen before in the willingness of enormous pools of money to diversify into commodities. As investments look better, more and more investments come to the party.

“I don't know what to say except to keep out of trouble, here. There's been a huge amount of money lost by the trade, and I'm sure there are winners, but I think the winners are mostly out of the business and on the investment side.

“Nobody wants to forward contract cotton. No one wants to be in the position of having to margin these commitments if the market continues to rally. Things are unhappy for just about every element of the business. What sense can we make of it except to try and keep our heads above water?”

Anderson said, “It's going to be interesting to see if this market wants to continue to trade in thin air (around) 82 cents… or if it is going to adjust downward. It appears that fundamentals would be calling for this. We are not moving cotton in the cash market at these price levels.”

When asked to name a price range for December 2009 cotton futures, analysts' answers ranged from 75 cents to a dollar.

Anderson believes that Texas cotton producers will plant about 5 million acres this year, but if it doesn't rain soon, Texas dryland cotton “won't make much of a crop. At least a million acres of the 5 million could be lost under conditions we're looking at today.

“This means this year's crop could be 2 million to 3 million bales less than last year, which puts the U.S. cotton crop under 14 million bales.”

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