World cotton carryover is projected to decline more than 6 million bales in the current marketing year, and “that's a move in the right direction” for bringing down stocks, says William “Billy” Dunavant, the world's leading cotton merchant.
And while potential for China to buy more cotton than expected could be positive, there are offsetting factors in the market that could dampen the prospect for major upside price movement, he told members of the Agricultural Council of Arkansas at their annual meeting at Memphis.
“Today, I'm really neutral. I see factors that could make cotton go to 54 cents, but there are also short-term factors that could make it go to 48 cents.”
Some market influences, Dunavant said:
China's cotton use: His company's analysts project China buying 1.2 million bales from the United States this marketing year, “but I think potential exists for perhaps 1.6 million.” They've been aggressive buyers over the past seven weeks, he said. “We've sold them Memphis territory cotton… because the price was cheap.”
The new U.S. farm legislation “is being questioned around the world,” Dunavant said. “Brazil and Africa are raising Cain because of our subsidies, and they've submitted petitions to the World Trade Organization to try to change the bill.
“I believe we're going to be fighting this battle every year. We've got a lot of friends in Congress, but we've got to be prepared to wage war every year.”
Commenting on loan deficiency payments, Dunavant said, “I have a hard time understanding how the U.S. cotton farmer gets more for his cotton when the price is low than in a year like this when the price is high. It's the LDP that's causing this to happen. “For me, the economics just don't work. It doesn't seem proper economics that you got a greater return last year when cotton was 35 cents than this year when it's 50 cents.”
Speculator activity: “Last year, commodity funds and speculators had 39.1 percent long positions, and that's getting to be a very scary number on the high side,” Dunavant said. “If something goes against them and they want to liquidate, that's a whole bunch of cotton futures contracts that have to be sold, and the market could go down 3 cents to 4 cents in a very short time.”
Another factor, “probably more critical,” is the 450,000 bales in New York Cotton Exchange certificated stocks, he said. “That's the biggest number I've seen in my lifetime — 200,000 bales would be a lot, and we've got more than twice that.”
The cotton, 80 percent West Texas and 20 percent Memphis, is two to three years old, Dunavant said, and because of changes upcoming between deliveries on March and May futures contracts, there will be a lot of pressure to sell this cotton. While these and other factors could cause the market to have a downturn, he notes, “If China buys more cotton than we're expecting, then we've got a chance to see the market rally.”
Dunavant said his forecast would be for “March cotton to have a low range of 48 cents and a high of 54 cents, but I don't see how it could sustain a rally until we get the March-May contract dispute resolved.”
The world price, he said, “is strong as horseradish. We didn't produce a lot of high-grade cotton in the world this year, and that's bullish.” But, he said, the influence of Step 2 marketing certificates coming into the market “will again make us non-competitive in the world. When you factor in the certificates, I think we'll be 2 cents less competitive for U.S. cotton.”
He looks for cotton to continue to trade in small volumes until the price gets under about 49 cents; “then it will begin to generate a large volume of New York March buying. Fifty-two cents would generate a lot of volume on the upside and speculators probably would increase their long positions to 45 percent or more.”