Cotton farmers might want to take advantage of any Christmas gifts from the market to protect against possibly lower prices as planting time nears.
“Farmers should consider forward contracts on 12 cents to 13 cents equity offerings,” said John Robinson, Texas AgriLife Extension marketing specialist, during a Texas Plant Protection Association conference in College Station. Considering local basis, net results could be 60 cents per pound, he said. “That’s better than anything we’ve seen in a while.”
Improved prices occurred in part because of “fall harvest concerns.” Hedge fund buyers also play a role and can “push the market up 10 cents with no real basis from the supply/demand side. That’s why we’ve had a fall rally.”
Early pricing may be the best opportunity for the 2010 crop. Robinson expects U.S. cotton acreage to increase, based in part on favorable prices at year’s end.
“How many acres will we plant next year? Growers will respond to higher prices,” he said. “But the Mid-South has seen a 30 percent acreage drop and they will not recover all of that. California may add 100,000 acres. Texas acreage could be up 5 percent to 10 percent, possibly as much as 500,000 more acres.”
He said equity contracts running from 10 cents to 12 cents above loan value will encourage West Texas farmers to plant cotton. “We could see U.S. acreage increase by a million acres in 2010,” he said.
World use poses another big question about price stability. If ending stocks are unchanged from 2009 projections, price should remain flat, Robinson said. World use is projected at 116 million bales.
He said December cotton could trade in the range of 60 cents to 80 cents on the futures market.
He expects, however, that forward contracts will “entice more farmers to plant cotton and the world will end up with more than we need. If ending stocks increase, price will fall more into the summer and fall. That’s a more likely scenario.
“We could get into the 60 cents range, possibly into the 50s. The last time we had 80-cent cotton was in 2003. By June it was down to 65 cents following a huge planted acreage. It went from 65 cents to 40 something. That was the last time we had high wintertime prices and I don’t see why the pattern will not be similar.”
He said current high prices likely will lead to more acres and then to lower prices.
Robinson expects China to plant more cotton in 2010. “India is a big question.”
Robinson said Texas cotton farmers are coming off a “year of extremes. We started off very dry and then it got worse, especially in South Texas. Conditions in the northern part of the state got better, but extreme heat may have hurt final yield. We had a very late crop but quality is good.”
He said quality of Mid-South and Southeast cotton is a different story. “The Mid-South had 20 to 30 inches of rain during harvest.”
Those harvest delays mean “several more months to sort out supply from the 2009 crop. We have a lot of uncertainty with a late crop.” He said a 12.5 million bale 2009 U.S. crop estimate “will be close. USDA is still tinkering.”
Demand is also uncertain because of continued recession repercussions. The economy, Robinson said, “affects purchase of semi-durable goods (textiles, for instance). Consumers can postpone buying decisions. Per capita cotton use drops during a recession.”
He said signs of recovery have not yet influenced the cotton market. “Has the consumption situation turned? I haven’t seen it yet. We may have bottomed out, but I'm not sure we’ve turned the corner.”
He said the continued uncertainty makes forecasting use more difficult. “Next year, will it be 113 to 114 million bales? We’re not sure.”
U.S. use is more certain, but may still be a bit “fuzzy at 3.4 million bales. Exports are estimated at 10.5 million and ending stocks should run 4.9 million.”
Robinson expects a lot of U.S. cotton to go into loan “while China uses up its own cotton. Then they will have to come to us for quality cotton. The High Plains has decent mic and okay staple length.”
He said no loan deficiency payment is available in the loan now. “We have two sets of cotton in the United States — very good and very bad. Decent cotton is likely to get 2 cents to 3 cents equity over loan cotton. Poor quality cotton likely will stay in loan for a long time and the price will probably be lower when it comes out sometime next summer.”
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