Old crop cotton bullish, new crop, not so much.
Old crop cotton pushed past 90 cents in mid-March on smaller expected supplies. But it wasn’t enough to drag new crop prices above 80 cents, an area of substantial resistance.
Market analysts suggest old crop futures surged on USDA’s March reduction of U.S. ending stocks to 2.8 million bales, a drop of 200,000 bales, thanks to the export estimate going from 10.5 million bales to 10.7 million bales. This was the lowest ending stocks estimate since 2010.
Speaking at the Ag Market Network’s March conference call, Jarral Neeper, president of Calcot, says U.S. ending stocks could decline further if USDA reduces the size of the 2013-14 crop. Ginning data suggest the reduction could be as much as 300,000 bales, which would take the U.S. crop down to 12.9 million bales. “We would be looking at a 2.5 million to 2.7 million bales in ending stocks, which means potentially more bullish runs ahead for old crop.”
Another good sign for the bulls was USDA reducing the estimate for ending stocks outside of China to 38.9 million bales. “Exportable supplies from our competitors was reduced another 300,000 bales and stands almost 5 million bales below a year ago,” Neeper said.
Outside market forces are also impacting the market, Neeper said. “Speculators are net long a hair over 54,000 contracts as of last Tuesday and are probably approaching 60,000 as we speak. That number is a bit worrisome. It wouldn’t take much to spook the specs into liquidating.”
Longer term, the biggest question mark for the cotton market is demand, Neeper said. “U.S. business has slowed to a trickle at these price levels and the differential between cotton prices and polyester prices is quite stark.
“Last year for the week ending Friday, March 7, the Cotlook A Index was 93 cents and polyester prices were 79.55 cents. As of last Friday, the Cotlook A Index was 97.55 cents and polyester was 66.54 cents. This is not sustainable over time as far as demand for cotton is concerned.”
Consumption numbers bear out a weakening in demand. In March, USDA adjusted China’s cotton consumption downward by 500,000 bales, which Neeper said was expected. “Pakistan was also down about 500,000 bales, and that is a little bit disturbing. If Pakistan consumption is being adjusted down, it’s because yarn exports to China may be slowing a little bit. If yarn exports to China are slowing a little bit, the entire textile chain is probably slowing down a little bit.
“Offsetting some of the million bale consumption decrease in China and Pakistan, were increases in India’s consumption by 250,000 bales, Bangladesh by 200,000 bales, and Indonesia and Turkey by 50,000 bales each.”
The news of a possible El Niño is also adding some volatility to the market, according to Neeper, but he added, “What is going to sustain higher prices is the demand-side.”
Old crop/New crop
Neeper and most analysts agreed that December 2014 futures at 80 cents remains a formidable wall for the market to ascend. “We tried to reach it two or three times, and we keep running short,” Neeper said. “I think we do have a shot at 82 cents by the time we get into the April-May time frame, but I think that will be due to the old crop yanking up new crop to some extent. And if we do get a surprise, and prospective plantings are under 11 million acres, that could send December as high as 85 cents.”
Neeper believes old crop “will visit 93 cents, and we have a shot at 95 cents.” He sees a range for new crop futures between 72 cents to 88 cents. “But the market will spend a lot of time in the 70s, with an occasional blip above 80 cents.”
John Robinson, Extension economist, Texas A&M University, forecasts a high in the mid-90s for old crop cotton futures, and a range of 72 cents to 82 cents for new crop.
Texas A&M Extension professor emeritus Carl Anderson says old crop has some bullishness left, but uncertainty is still the watchword for new crop prices. “We have surplus cotton in China, polyester prices well below the futures, and we have unknown cotton production from new crop due to adverse weather and uncertain acreage.
“For old crop I’m looking at between 84 cents and 94 cents. New crop is going to struggle for 80 cents, but I’ll going to go with a range of between 70 cents and 83 cents.”
Robinson said producers should pay close attention to choices they make when signing up for the new farm bill. “What you do will affect you for the next five years. The choice you make in 2014 is going to matter in regard to the flexibility you have and the payments you get in the future.
“People who think of themselves primarily as cotton producers need to recognize and study up on and participate in some of the various educational programs that are going on.”