The cotton market requires producers to focus on five factors to be successful in marketing cotton today, according to Mike Stevens, Swiss Financial Services, Mandeville, La.
Stevens will conduct a mid-morning seminar on cotton markets, Friday, March 2, at the Mid-South Farm and Gin Show. The show, sponsored by the Southern Cotton Ginners Association with Delta Farm Press as co-sponsor, will be March 1-2 at the Cook Convention Center in downtown Memphis.
Stevens says to start by learning the technicals and the fundamentals.
“Technical analysis is knowing the charts detailing price movement. Markets tend to have repeating patterns. There are several indicators — such as when one moving average crosses another — that spark buying and selling.
“The other half of that is fundamental analysis, which is based on supply and demand. The market goes up to find supplies and goes down to find demand.”
Producers should also study the impact of index and commodity funds, which is a learning process even for an experienced analyst like Stevens.
“Everyday there is a mystique surrounding the markets, and it’s becoming increasingly so the last few years with the rise of the funds. It’s no longer the Dunavants and the Hohenbergs. Gigantic funds control the markets, and sometimes they move with the grace of an elephant. They can take a market further and faster than you’ve ever dreamed when they start moving.
“It’s becoming increasingly important for producers in designing a logical strategy, that they learn what these funds are watching.
“Know the farm bill backwards and forwards to determine how to market your cotton — with the AWP (adjusted world price) being the focus.”
Stevens says that under the current farm bill, “everything is being grown for the loan. We’re carrying these huge loan stocks. Today (early February) there is very little cotton moving into marketing channels.”
The expiration of Step 2 is having an impact on moving cotton, noted Stevens. “We never really knew how much we were going to miss Step 2 until it was gone. It provided that fudge factor for the merchants, a little wiggle room where they could bid on equities and offer cotton overseas. Without it, they’re hamstrung and so no more than about 20 percent of last year’s crop has moved into marketing channels this year. We’ve been thrust into the role of residual supplier.”
Stevens says USDA statistics indicate that demand will move cotton eventually. “When you look at the gap between world production and world consumption with the United States out of the picture, it shows you what the market is, and it’s a sizable market. But there has been absolutely nothing to encourage mills to stop hand-to-mouth purchases and keep low inventories.
“Our farm bill gives producers a measure of protection on the way down, but not on the way up,” Stevens said. The market can gyrate 10 cents a pound in futures and U.S. producers’ equity may not increase at all. That’s what we’re seeing right now, market gyrations as the funds move in and out, yet we can’t get cotton freed up from the loan. It’s imperative that a producer learn how to decipher the AWP and how it’s derived and to watch it on a daily basis, because that is what determines the value of his loan equity.”
Nearly every producer should consider having options rather than futures in his marketing plans, according to Stevens. “Options are a basic strategy that should be part of the producer’s repertoire for marketing. Options give the producer an opportunity to maximize his return. But it has to be done carefully. It’s like insurance in some ways, but options allow him to redeem part of his premium if he winds up not needing it.”
Finally, have faith in your broker and don’t be shy about calling the broker or about asking questions, Stevens advises. “The broker needs to be well-versed and not confusing. The relationship needs to go a lot further than just paying somebody a commission.
“Make sure he works for a reputable clearinghouse, but it doesn’t necessarily have to be a major firm. The broker needs to have good floor connections in New York. It’s perfectly permissible to ask a broker who he does business with on the floor.”
Stevens promises one thing about his discussion at the gin show. He’ll decide what to say at the very last minute. “I want it to be timely. Hopefully, we’ll discuss the subject de jour at the time. The timing is perfect because we’ll be between the National Cotton Council’s estimate for acreage and USDA’s estimate. Plantings are a moving target and will shape up according to how the grain markets are behaving.”