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Pain threshold may hold key to price

Are New York cotton futures poised to go higher or are they preparing to fall back to lows not seen since 1972? That's the question on many growers' minds as they try to convince their lenders to loan them enough money to go one more year. It, unfortunately, is a question without a simple answer, according to analyst Sharon Johnson.

Johnson, speaking at the Beltwide Cotton Conference in Atlanta, said the large U.S. and world crops coupled with economic recession and the events of Sept. 11 created “prices that have not been this low in several lifetimes.”

Whether U.S. growers have seen the worst or the worst is yet to come may depend on the answer to the following question: “Have prices been painfully low enough, long enough, to begin the process of reducing supply while stimulating demand and, therefore, shrink ending stocks here and abroad to acceptable levels?” she asked. “Although seemingly simple, the answer is very complicated given how intertwined the U.S. and world cotton markets are.”

Johnson, an analyst with Atlanta-based Frank Schneider & Co., said an amazing number of negative fundamentals led to the “perfect storm” that engulfed the U.S. and world markets last year.

“Most of the negative fundamentals have already been identified, including the record size of the U.S. and world crops resulting in burdensome ending stocks especially in the United States; an eroding economic environment at home and overseas; U.S. mill consumption dropping to a 13-year low due to foreign imports and the strong dollar; and, of course, the Sept. 11 terrorist attack that further exacerbated perceived weakness for any and all commodities,” she noted.

“The market's sell-off that began in November 1999 and continued through most of 2000 was truly extraordinary and considered history-making by many traders and analysts.”

Johnson told Beltwide participants that the difference between the seasonal high and seasonal low from year to year typically averages 15 to 20 cents. “Normally, the more bullish the year, the wider the range and vice-versa, but this past calendar year and the current crop year has run contrary to that rule.”

As of the Beltwide, the cotton futures market had been as high as 42.60 cents per pound basis the October contract in early August and as low as 28.20 cents in late October basis the December contract, a difference of 14 cents. On a larger scale, the nearby month has fallen more than 30 cents in the last 14 months.

“A review of technical indicators illustrates how unusual that price movement was and will help put in perspective the size of the drop as well as the absolute price low reached,” she noted. “The Relative Strength Index, Stochastic and other indicators of recent months show not only how one-sided the market move was but also just how low futures traded down using a percentage scale.

“When inflation is taken into account, you could even say that cotton prices have not been this low in several lifetimes.”

Based on the recovery of the market to date since the October low, Johnson believes an upside price of 43 cents per pound is possible with the spring contracts. “This price level equals a 38 percent retracement of the 30-plus-cent drop and also represents a significant support/resistance level on the weekly chart,” she notes.

“Some technicians are using 48 cents as their upside target, which is a 50 percent retracement of the entire sell-off, but my suspicions are that we may not see prices that high until sometime in 2003” because of high ending stocks levels.

She also thinks the July contract may have difficulty moving higher unless U.S. springtime plantings are much lower than anticipated. “In fact, July could bear the brunt of this year's U.S. burdensome stocks and pressure from possible overseas panic selling as the season winds down.”

Conversely, a sell-off back into the 20- to 30-cent range in the near-term contracts appears doubtful unless fundamentals worsen substantially or another Sept. 11 attack occurs.

“Cotton futures, having run up 10 cents from the late October low, have held extremely well in the mid-30s,” she said. “With the funds in a moderately long position, it is possible this area of support could be breached. The key to any re-test of the low 30s is tied to where sufficient mill buying is waiting in the wings.”

For new crop, New York futures should continue to find support in the low to mid-30-cent range into harvest, barring another sharp increase in ending stocks and assuming that the Cotton Outlook A Index will move higher as organizations such as the International Cotton Advisory Committee are forecasting.

“However, potential actions by the Commodity Credit Corp. in auctioning off substantial portions of loan cotton forfeited by producers could weigh on cash and futures enough to threaten this crop year's seasonal low,” she notes. “If the 28.20 low fails to hold, the next line of support is approximately 26 cents, the 1972 low.”

In general, when prices fall as quickly and dramatically as they did in 2001, it is a one-time event such as the low that occurred in 1986 or the high in 1995, Johnson said. So, the big question may be whether history will quickly repeat itself with even lower prices this fall or if growers have seen the worst of these prices?

“Those technicians I know and trust say it is the latter,” she said. “Perhaps the best response for you and I as fundamentalists is to hope the technicians are right but be prepared if this crop year's lows fail to hold as the market attempts to make that final generational low.”

e-mail: [email protected].

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