An eventful July in terms of weather and cotton price volatility has continued into August.
To review, in mid-July ICE cotton futures broke out of their longstanding trading range and rallied into the mid-70s, then peaked in early August around 78 cents, before abruptly reversing back below 70 cents.
The rally and decline coincided with the conclusion of a very dry Texas July and then a rainy August. In addition to the rains — and maybe because of them — the cotton market appears influenced by the buildup and partial liquidation of a sizeable net long hedge fund position (i.e., the teal colored area in the right hand portion of Figure 1).
Meanwhile, the regularly scheduled cotton market benchmarks were not apparently influential on prices. The USDA’s August forecasts of 2016/17 U.S. cotton supply and demand numbers did not involve many changes from the previous month. The August projections can be significant because they are the first production projections based on field sampling of squares and bolls.
As it turned out, the August change in forecasted production was a minor 80,000 bales, resulting from a slight decrease in abandonment coupled with a slight reduction in yield per harvested acre. After a small adjustment to the “Unaccounted” category, the bottom line was a 100,000 bale increase in projected ending stocks, to 4.7 million bales.
WHERE FROM HERE?
Such a monthly adjustment would typically be price neutral. USDA’s forecasts of foreign and world projections involved a more bullish month-over-month reduction of 1.1 million bales of new crop cotton ending stocks. This was mainly due to changes in carry-in and production in China, India, and Australia.
In hindsight, I hope some growers took advantage of the market offering futures in the mid- to upper 70s. But where do we go from here?
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As I emphasized in a prior column, the price outlook is unavoidably uncertain. As this summer’s example illustrates, market movements can be volatile and fleeting — especially weather markets. Growers should be mindful of the possibility of lower prices as the weather premium fades and seasonal harvest pressure kicks in. But even that is uncertain.
The relevant question remains whether to price or hedge prices based on what you know today. Today, you know where prices are, you have an idea of your production costs and some minimum production levels, and you can pencil in what your minimum price would be using cash forward contracts, futures, or options.
If today’s price results in an acceptable return, then consider pricing or hedging some portion of your expected production.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/