Shortage of quality cotton helping to prop up prices. Will floor hold at 75 cents?
Strong demand pushing cash prices higher. But what will China do? Experts weigh in.
Cotton prices may have taken an unexpected dip into lower territory over the last few weeks, but cash prices and demand remain strong, according to market analysts speaking at the Ag Market Network’s November conference call.
“The market appears to be holding a support level at around 75 cents, which was about 6 cents lower than I thought it would go,” said O.A. Cleveland, professor emeritus, Mississippi State University. “Now we are in a consolidation phase, after 14 consecutive losing sessions. I think we could end up back at the 81 cent level and could move as high as 83 cents somewhere down the road.”
Cotton demand is strong
Cleveland says demand for cotton is providing some buoyancy to the market. “We are awash with cotton, but that is not the whole story. High quality cotton still remains in very short supply. Mills are actually in the marketplace fighting it out in the cash market trying to obtain this needed supply.”
This includes desirable lots of west Texas cotton “which are moving at a premium to futures and that is almost unheard of,” Cleveland said. “As we know now, the bulk of the quality crop in the United States is in the west Texas crop. So they have the opportunity to demand a premium price.”
USDA’s first crop production report in nearly two months, released Nov. 8, wasn’t much of an earth shaker as far as cotton was concerned, although USDA did peg Louisiana average cotton yields at a remarkable 1,306 pounds. Some producers have exceeded 4- and 5-bale yields this year. USDA also projected Arkansas average cotton yields at 1,120 pounds, Mississippi, 1,090 pounds, Missouri, 1,046 pounds and Tennessee, 878 pounds.
Globally, USDA made historical revisions which increased world stocks by a million bales to over 96 million bales, about 87 percent of one year’s use
USDA also increased U.S. cotton carryover by 100,000 bales, “but it remains extremely tight,” Cleveland said. “It’s now up to 3 million bales, but I believe it is going to fall during the season. I can see it coming down another 200,000 bales to 300,000 bales.”
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Cotton exports rise
USDA also raised its estimate of the U.S. crop to 13.1 million bales. “USDA elected not to increase U.S. exports, leaving them at 10.4 million bales, and that was a surprise to me, given the recent business and attitude of the Chinese mills, which implies more exports for a very limited supply of U.S. cotton. I think we will see exports reach 10.6 million bales.”
Cleveland noted that U.S. cotton can be landed at Chinese mills at substantially less than Chinese cotton can. “This price slippage below 75 cents paved the way for even more export sales. The week ending Oct. 31 totaled 307,000 bales of upland and Pima.”
Demand is not just coming from China, Cleveland said. “It is widespread in the consuming countries. The United States has sold over a million bales just in the last month. That was demand not plugged into previous estimates.”
Cash prices strong at harvest
Strong demand “why the basis is so high,” said Kelli Merritt, cotton producer, broker and merchant from west Texas. “For low grades, we’re seeing the basis 200 off December and for high grades, 400 on December. The basis is typically 600 points to 700 points off December.
Merritt says the basis “is an excellent opportunity for us to sell. A lot of producers are hesitant to sell with the market down. But I anticipate as this market goes up, somewhere in the next couple of weeks, that basis is going to widen back out. I highly recommend that growers sell cotton while the basis is good. If they think the market is going to run up, buy calls. You can benefit more from doing that than holding cotton waiting for it to go higher.”
As for 2014, cotton futures trading in the upper 70s will be enough to encourage cotton planted acres in Texas, according to John Robinson, Extension economist, cotton marketing Texas A&M. “We may not have an upswing in cotton acres, but we should be able to hold what we have.”
Cleveland says much of the Southeast and Mid-South need higher prices than that, especially with costs of production about equal to current cotton prices of 75 cents to 77 cents. “I’m concerned that we will again lose acreage in the Mid-South and the Southeast.”
Carl Anderson, Extension professor emeritus, Texas A&M University, sees 2013 futures in a 72 cent to 84 cent range. “We’ve seen this market move 10 cents either way. If we get any rallies around 84 cents, you need to fix prices. For 2014, I’m still concerned about China selling off its stock. I’m looking for a 70-cent bottom and maybe 65 cents. For the upside, I’m looking at 85 cents.”
Robinson sees a range for old crop cotton at 72 cents to 82 cents, and new crop at between 70 cents and 80 cents. Robinson added that at-the-money put options for December 2014 are still at reasonably-priced levels.
Cotton prices headed toward 80 cents?
Cleveland, as usual, was more optimistic about old crop. “I think we have seen the low for 2013. We could get back to between 80 cents and 85 cents, but it would take some oomph to get us above 83 cents. For 2014, I don’t sense that the world is concerned that China is going to dump any cotton. They have more at stake in protecting that huge supply of cotton. So I don’t see a decline in Chinese imports.”
For 2014, Cleveland says, “We could get a bear run that could take it down to 73 cents to 74 cents, but I think it moves back up to 82 cents to 83 cents.”
Merritt says Chinese purchases of cotton have slacked off after a flurry of purchasing to fill quotas which required cotton landed in China by the end of December. “You would think that would slow demand but it hasn’t. There is big demand from all countries now.”