The cotton market appears stuck between a rock and a hard place, according to analysts speaking at the Ag Market Network's November teleconference, with rising certificated stocks and ending stocks and slow trade having a negative impact on prices.
About the only good news is the cotton market somehow survived a Monday, Nov. 13, washout which broke all previous New York Board of Trade records for volume at 61,464 contracts. Luckily the lows were made within the first 10 minutes of trading.
According to Mike Stevens with Swiss Financial Services, the large supply of certificated stocks (811,000 bales) is keeping December far under the March. “It's a double whammy. With the close proximity of today's price to the adjusted world price, U.S. shippers have a hard time offering cotton. You can't get the cotton shaken out of the loan when you have the AWP holding firm and futures as low as they are. As they try to offer March cotton for first quarter, that contract is too high. So that puts us out of the ballgame there. About the only shippers who can make any export sales right now are those with hedged inventories.”
Part of the problem has to do with slowing demand from China. In November, USDA reported that Chinese imports were down for the fourth consecutive month. Chinese mills are continuing to run competitively-priced internally-produced cotton and still have a large supply of cotton imported prior to the expiration of the Step 2 program.
The growing U.S. cotton crop is problematic as well. Increases in USDA's November estimate of yield in Georgia, Mississippi, Alabama and Texas came as a bit of a surprise. The result is a forecast supply of 21.3 million bales, a 640,000-bale increase over the October report.
USDA decreased domestic mill use by 100,000 bales in November and increased exports by 200,000 bales to 16.2 million bales. The latter “was not widely expected, but USDA is focusing more on foreign stocks-to-use outside China and there was some rationale for that,” said Texas A&M Extension economist John Robinson
Market analyst O.A. Cleveland says the export figure, if realized, has a downside. “I understand USDA thinking that the more you produce, the more you are going to export. That theory has served USDA accurately through the years. It says unfortunately, that we are going to have to take this market a bit lower if we are going to export those types of numbers. That's why I'm a bit more bearish.”
And it could be this way for a while, according to Stevens. “I don't think we will see real good business out of China for maybe a couple of more months. The United States is going to be the residual supplier for the rest of the world. That's what USDA is banking on, that we have the exportable surplus and the world will have to come to us sooner or later. But it's likely going to be later. The Chinese using their own interior stocks is one of the big problems right now. We're not going to see any big sales to China because their own price is so competitive.”
Robinson projects an old crop cotton price in the mid-40s for December and maybe a few cents higher for March. “For new crop, the fundamentals don't suggest patterns much different than we've seen in the past, so I see December 2007 trading to 59-60 cents.”
Cleveland believes old crop cotton, December/March, could get down to 42-43 cents, 49-50 cents on the high side. “If December becomes attractive on new crop, I can't get above 60 cents because of the bearish numbers, so I'm thinking in the mid- to upper-50s.
Stevens noted that there was a silver lining on the Nov. 13 trading. “With 61,000 contracts trading Monday, they hit it with everything but the frying pan, and the lows were made within 10 minutes of the opening.”
Cleveland noted that current high grain prices “very much favor a decrease in cotton acreage in the United States and globally for the next growing season. Cleveland believes that in the United States oilseeds will go on marginal cotton ground with corn going on the better cotton soils. “I would anticipate a reduction in U.S. cotton acres of 500,000 acres and 2 million to 3 million acres worldwide.”
When asked to put on his political prognosticating hat, Cleveland said he doesn't believe recent congressional elections handing control of both the House and Senate over to Democrats will have a dramatic effect on a farm bill, although, “what scares me a bit with respect to cotton is the prospect of going from Sen. Saxby Chambliss, R-Ga., to Sen. Tom Harkin, D-Iowa, as chairman of the agriculture committee. That does challenge us with respect to government payments and the farm bill.
“But politics being what they are, we're likely to see this farm bill extended for two years to get past the next presidential election. I think there will be some special legislation to reduce government payments. By and large, I don't think there will be a big change, other than producers having to rethink their bottom lines if they lose 10 percent to 15 percent of the government payment.”