A recent surge in cotton exports after a dip in the market should start to put some fundamental legs under the market and perhaps solidify a bottom for the low end of a trading range, according to analysts speaking at the January Ag Market Network teleconference.
Mike Stevens with Swiss Financial Services said the low could stick around 45 cents to 46 cents, with a high of around 51 cents. “That would be extremely healthy if we set up an identifiable trading range. That encourages the mills to step in.”
Stevens said that the long decline in the market since last March “has eroded confidence in the market. And demand has been destroyed by the economic situation globally.”
A declining market actually runs off business, Stevens says. “Anything end users have done since March has been wrong. It makes them gun-shy and demand begins to get pent up, even though it's not the type of demand that we would need to have a true bull market.
“From what we've seen, that demand is starting to surface now, and the sales are for nearby shipments.”
Stevens also noted that with both China and India holding cotton off the market, “it could help hold a bottom as long as cotton doesn't get dumped anywhere.”
According to Texas A&M Extension economist John Robinson, liquidation by index and hedge funds are starting to level off. “The hedge funds are now slightly net long again. So maybe the worst is over. At least they don't appear to be deleveraging anymore.”
“It would be extremely helpful if prices move sideways in a 3-cent to 4-cent pattern for a month,” Stevens said. “There are still plenty of bears out there. But there is money on the sidelines. With any sign of encouragement, I think we're going to see the funds come back in.”
If that happens, “hopefully, we won't build the open interest to a dangerous level,” Stevens said. “We were ridiculously high at 300,000 contracts last March. If it stays below 150,000 contracts, fundamentals have a much better chance of ruling the day. We don't want to go back to the day when the funds were dictating everything.”
“We do need the funds to provide the liquidity calls for it,” Robinson said. “We've seen what happens when they step out.”
Market negatives include the falling price of crude oil, which seems to have a similar impact on commodity prices, and the rising value of the dollar.
But as analysts have come to know over the last two years, the cotton market is fickle. “One day, it seems like crude oil takes the lead, the next day, the dollar takes the lead, then the grains are the big influence,” Stevens said.
Stevens says when the market is at the low end of an identifiable trading range, “it's a good idea to use calls or call spreads. On the other hand, this is not a time to get bullish cotton. Watch the adjusted world price closely. Take advantage of market rallies to come out of your call spreads and move your loan equities.”
The funds can also move the market if they come into the market in a big way.
Keep an eye on three potentially bullish factors, Robinson says. “If we end up with less than 8 million U.S. acres planted, if half to two-thirds of that is in Texas and it stays dry, speculative froth could push December 2009 up into the upper 50s and maybe over 60 cents. Producers need to be ready to take advantage of that situation. If they haven't positioned themselves with a call spread, then get ready to go in quickly and place a put option. I wouldn't expect it to last very long.”
Robinson said Texas acreage could dip 5 percent in 2009. “We'll have a reduction in south Texas on the Gulf Coast. Growers with a fixed cotton, grain sorghum rotation will push their mix toward grain sorghum. Where they have more alternatives in the Rio Grande Valley, they'll probably plant more of those alternative crops.”
In west Texas, an indicator of cotton acreage is how much winter wheat is planted, according to Robinson. The latest report showed only a small percent increase from the year prior. “I don't know that we'll be that much different (from the usual crop mix) in west Texas. Overall, I think we'll have a slight reduction, maybe 5 percent.”