With an uncertain national economy and volatile equity and commodity markets, the price of cotton is being influenced by many outside forces, according to a Texas AgriLife Extension Service economist.
However, even in uncertain economic times, the outlook appears to be positive for Texas cotton producers, said Dr. John Robinson, AgriLife Extension cotton marketing economist at College Station.
“If you're growing cotton, you are going to see better prices than you've seen in the past eight to 10 years,” said Robinson, who spoke recently at the Texas Farm Bureau Leadership Conference in College Station.
Background considerations include:
Across-the-board reductions in cotton plantings in 2007. All U.S. cotton acres were down some 29 percent with ethanol production weighing heavily in the shift of planted acres.
Though West Texas had record yields and generally good quality cotton, lower yields and poor quality prevailed elsewhere in the Cotton Belt.
Rainy conditions in China hampered crops in 2007, lowering yields and quality.
These factors, along with “jittery markets” where money is flowing in and out of agricultural commodities, tie everything together in the cotton price scenario, Robinson said.
“The March/May futures trading had prices at 65 to 66 cents, and the mills bought 500,000 bales of cotton one day,” Robinson said. “The next day the market went up. Then the mills typically quit buying and waited for prices to take a dip. A lot of this is being influenced by the stock market and investment funds, too. When something causes a pullback, the commodities markets will react.”
Cotton is competing with other acreage, Robinson said, and cotton is fundamentally tied to the stock market.
“New towels, drapes, clothes; these are more luxury type goods,” he said. “If the U.S. economy goes into recession, this can have ripple effects back through the retail, textile and cotton supply chain worldwide.”
Another segment to consider is index funds, which buy commodity futures attempting to mimic the Dow Jones AIG Commodity Index, Robinson said.
“All they do is buy futures contracts,” he said. “They buy and hold cotton futures as well as other commodities. Commodity funds can give as good a return as the stock market, but it's also very, very risky. This is also why you see cotton prices moving up or down with grains, metals, oil, etc. These funds are stepping in and buying shares causing a reaction.”
Traditional hedge funds, on the other hand, will buy or sell futures according to market trends, he said. Combining both index and hedge fund transactions result in a “swing with the wind where you see 3 cents, 4 cents, 5 cents, and 6 cents in change when they are both buying contracts,” Robinson said.
Nearby cotton futures prices are predicted to hold in the mid-60 cent range, though they could continue to rise considering carryover stocks were at 3.47 percent going into the 2007-2008 year, Robinson said.
“You could see trading of new crop cotton futures reach the low to mid-80 cent range,” he said.
However, Robinson cautioned producers not to overextend themselves in purchasing new equipment, land or making other capital investments if cotton prices continue to rise.
“Remember, this type of market situation isn't going to last,” he said. “Though you may be in a situation where you see that prices are high, the costs of production and equipment are rising, too.”