The cotton market is like a bull in a China shop — literally and figuratively, according to market analyst O.A. Cleveland, professor emeritus, Mississippi State University. But he urges growers to not get too excited about prices. A burdensome bear still has bite.
Cleveland worries that world cotton carryover, which stands at around 48 million bales, 11 million bales above last year, suggests that the cotton market “should be on its heels, taking deeps sniffs of ammonia just to remain standing. Yet with every knockout blow, the market rights itself and amazingly charges ahead — the classic bull in a china shop.
“Since falling below 42 cents in the fall of 2004, the market has crawled, limped and, a couple of times, even leaped higher. How could this be with the very large carryover stocks situation?”
The big reason is the bull in the China shop, or should we say China's shopping public. It has a huge appetite for cotton which continues to add excitement to the cotton market, according to Cleveland.
Two events had the market buzzing at the end of April, he said. “Demand showed its force in the cotton market as a major international cotton merchant stood for all of the deliveries on the May contract, about 200,000 bales. In addition, the merchant decertificated nearly 100,000 bales.”
The events led to speculation that a 300,000- to 500,000-bale export sale to China had been made. The assumption turned out to be a little shy. Actually, of the 931,000 bales of upland sold for the week ending April 28, 665,000 bales went to China, 165,000 bales over even the most optimistic prediction.
The market promptly dove 4 cents a pound, because as Cleveland pointed out, “the market had decided that the sale had been factual several days prior to the report.”
There are still questions about China, noted Cleveland, primarily over how much cotton it will eventually purchase. This uncertainty plus attempting to forecast China's needs for 2005 “had driven prices to the upper limit of recent technical resistance.”
In addition, “speculators and funds hold a record long position in the market.”
Cleveland cautioned against too much optimism since the current stocks situation portends a much lower price. On May 5, when December futures had slipped to 54.60, Cleveland noted, “I didn't think it would slip below 55, but I think it will come back. I doubt we'll go below 54 cents until the crop is up. I think we'll see December back up around 58 cents, and I would want to do some pricing at 57 cents and above.”
Despite the cool weather in California, the Mid-South and parts of the Southeast, “the calendar says ‘plant’ and we're planting.” Cleveland said. “One has to think that Mother Nature will come around pretty quickly, it being May. There's still so much time. The market has not shown any concern as of yet.”
Cleveland believes U.S. cotton acreage will come in around 14.1 million acres for 2005, slightly higher than early USDA projections from grower surveys. “Texas will be up and most other areas will be up, too. Farmers still remember last year's good crops.”
Cleveland doesn't expect yields approaching last year's records for U.S. growers. “The increase in yields last year came about because of varieties that have proven to be higher-yielders, and we had ideal temperatures in the Southeast and Mid-South. We seldom got over 90 during the daytime and seldom got under 70 at night. We will discover that Mother Nature gave us wonderful weather in 2004. On the other hand, our yield plateau has increased because of better varieties.”