Be on your toes, cotton producers — whatever pricing opportunity the market provides in the coming months may not last long, according to analysts speaking at the Ag Market Network's Sept. 14 teleconference.
As of mid-September, fundamentals were supportive of cotton prices. In USDA's Sept. 12 World Supply and Demand Estimates, the agency lowered foreign and world beginning stocks for 2007-08 from August by a million bales, reflecting changes in the balance sheet for India, Pakistan and China.
USDA also raised world production by 1.26 million bales over the August report, due to increases in production for Brazil, 600,000 bales, Pakistan, 600,000 bales, India, 500,000 bales, and the United States, 460,000 bales. At the same time, USDA raised world ending stocks slightly from the August report.
However, the world stocks-to-use ratio is still at 40 percent. “The trend we've seen over the last couple of years of foreign stocks trending lower is still with us, said Texas A&M Extension economist John Robinson. “So we're still in a situation where any supply or harvest problem anywhere in the world will produce a potential for upside price volatility.
“The upshot is that we should have good support for the A-Index to stay where it is. The implication for growers is that a strong A-Index in the upper 60s means a minimal loan deficiency payment.”
USDA also reduced U.S. projected planted acres and harvested acres for 2007 and increased projected U.S. average yield from 783 pounds per acre to 811 pounds.
Robinson noted that the most dramatic change in USDA's assessment of the U.S. cotton crop since August is higher-than-expected increases in production in west Texas. Eighty-five percent of the increase came from the High Plains and the Rolling Plains.
“But to my way of thinking, there is a lot of uncertainty around that forecast. The crop is two to three weeks late, and there are a lot of small plants out there. It's a race against the calendar, and I'm reminded of the old football adage, ‘When you throw the football, three things can happen and two of them are bad.’
“They need four to six weeks of warm, sunny weather. But we could also have an early freeze in October, or we could have several weeks of misty, cloudy weather that could whittle away at the crop's yield potential. But the biggest impact if we get the rainy weather could be a shortage of quality grades.”
Robinson and Mike Stevens, an analyst with Swiss Financial Services, advise growers to not get too caught up in the fundamentals, especially with so many bullish speculators in the market.
“The commercial and large speculators are using options rather than futures, and the options volume is growing,” Stevens said. “Open interest is about two-and-a-half times that of a year ago. But because of the long-term picture in grain, the deep-pocket funds are building a very long-term picture in cotton. There are a lot of bets being placed on a roaring bull market in cotton.”
“If either speculative forces get revved up or there is some type of knee-jerk reaction to harvest problems somewhere, you should be ready to jump in and use options and take advantage of any rally in setting floor,” Robinson added. “It may happen quickly and fizzle fast. So be ready to take action.”
“When the specs get involved in this market, they can take it much further than they should and they will.
“If you look strictly at the fundamentals, you can get run over by those guys,” Stevens said.
“Big moves are made for producers to take advantage of, to give them opportunities that would not otherwise exist. It's going to behoove the producer to be judicious in the use of options. Remember, the end will always come quicker than we think it's going to.”
Stevens says a conservative objective for December 2008 is 80 cents. But at 75 cents, you have to be on your toes.”
Robinson's range for December 2008 is 68 cents to 80 cents. “On the other hand, if you pencil out breakeven net returns between soybeans, corn, wheat and cotton, in a lot of regions, you have to have more than 80 cents to justify planting cotton.”