Cotton prices have settled into a lower, but tighter, trading range, which has decreased volatility and created some marketing opportunities for producers. On the other hand, there is also some concern about weakening fundamentals, according to Ag Market Network analysts discussing USDA’s October supply and demand estimates.
In the reports released Oct. 12, USDA increased the U.S. cotton crop by 52,000 bales to 16.6 million bales, “but I think most people were looking for a crop of between 16 million to 16.3 million bales,” said O.A. Cleveland, professor emeritus, Mississippi State University, and featured speaker for the monthly conference call.
The higher estimated production came largely from a 180,000-acre increase in harvested acres. Yields were increased only slightly, 2 pounds, from last month. The estimate of U.S. ending stocks increased 500,000 bales, “a rather significant increase, and would suggest that we begin to push prices lower,” Cleveland said.
USDA lowered U.S. exports from 12 million bales to 11.5 million bales, another 500,000-bale decline. “The stocks-to-use ratio is still at 25 percent, so that’s a number that we’re still very comfortable with,” Cleveland said. “But USDA also projected that world carryover was going to increase by 3 million bales, from 52 million bales to 55 million bales, which is beginning to get on the high side.”
USDA dropped the Chinese cotton crop a half million bales, and dropped its forecast consumption by an equal amount. Worldwide, USDA increased production by 1.2 million bales and lowered consumption by 850,000 bales. Cleveland noted that USDA also released adjusted figures on stocks which bumped world stocks by 900,000 bales.
Cotton future prices dropped on the news, but bounced back in overnight trading, suggesting some resiliency in the market. “The market is sitting right back where it was before the report,” Cleveland said. “So it’s difficult for me to say it was a bearish report. We have a lot of work to do to understand what all this cash in the world is going to do, where traders have stepped out of both equities and commodities.”
Mike Stevens, a cotton analyst based in Mandeville, La., says the U.S. crop estimate may get smaller from here. “Last year, it was November before the USDA cut 600,000 bales from the Texas estimate. That was based on boll size, not boll count. I don’t think the Texas numbers are written in indelible ink by any stretch of the imagination. I have heard of some harvesters getting into the irrigated cotton, and it’s being abandoned, too.
“There’s no doubt that yesterday’s report was bearish,” Stevens added. “When you look at the world situation, we are flush with cotton.”
The move to a lower and narrower trading range began about a month ago, according to Stevens. “The market looked pretty strong, with the moving average and the momentum all pointed higher. We thought we would stay in the $1.15 to $1.25 trading range to the upside and 95 cents on the downside. Then on Sept. 19, it broke below $1.09. It was an absolute killer. It broke well-defined uptrend lines and led to nine straight sessions below a dollar. The amazing thing was that the market continued to hold.
“The last 16 sessions, we’ve had three weeks with a less than 6-cent range, from 98 cents to $1.04 area. We’ve built up layers of overhead resistance on the charts from $1.04 to $1.08. The interest really runs out when you get up to $1.04.”
The downside has been firm too, notes Stevens. “For whatever reason, the market continues to have good support around a dollar. We get down there and run out of gas on the downside. We’re stuck in this real small trading range.”
One good thing about the narrow trading range, according to Stevens, “is that it has brought the option volatility down to some very manageable levels. This low volatility should be taken advantage of.”
“There is a shopping opportunity with options.” said John Robinson, Extension economist at Texas A&M University. “If somebody had cotton to sell, and hasn’t put a floor under it, they could. Or they could harvest, contract it, then buy an inexpensive call spread.”
Carl Anderson, Extension professor emeritus, Texas A&M University, is still very concerned about weakness in cotton demand. “Economics always wins in the long run, and (lack of demand) is beginning to show in the numbers,” he said. “I’m seeing much more polyester blend with the cotton. It really bothers me that we have an export-driven market. If China and Pakistan, India and Brazil have cotton to sell, they’re going to sell it. We have a very troublesome market. I’m very concerned about the future of the market once we get a realistic supply and demand picture in line with the speculative side of the market.”
Anderson sees cotton prices ranging from 85 cents to $1.05 for this fall. “But when you have a buildup of cotton supplies, you’re going to have a low, weak harvest price throughout the year. Look at what happened in 2003 when October shot up based on unexpected Chinese purchases. Prices started out the year in the 65 cent range and ended up at 40 cents.”
Cleveland doesn’t see a trading range quite that low, but doesn’t see much potential to the upside either. “I’ve stuck with a 93- to 95-cent floor. Getting above $1.06 to $1.08 is a challenge. I don’t think it’s possible that it will go above $1.15. I’d be stunned if we got above $1.08.”
Cleveland noted that the Chinese typically start to rebuild their reserves somewhere around 95 to 98 cents. “So there’s fairly good support there, not for consumption, but to store.”
Another buoy for cotton prices in 2012 is that for cotton to acquire acreage, the price has to remain competitive with the grains and oilseeds.