Cleveland: Outside Factors Take a Toll, But Cotton Will Rebound

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The market’s preoccupation with the liquidation of the May futures contract took its toll all week as prices worked to maintain technical support at the 84-85 cent level. That support should hold, but a stiffer support level lies at the 82 cent mark. Further on down the line is very strong support at the 78-79 cent level. No! I do not expect the market to test the 78-79 cent level. Likely, neither will it test the 81-82 cent support. Fundamentals fit comfortably with the 84 cent support and that should hold the current sell off. My view remains unchanged, that is, the market will work toward the upper 80s and challenge the 90 cent barrier again.

USDA released its April supply demand report on Wednesday and raised U.S. exports to 13.0 million bales, as has been suggested since February. World consumption was increased and production was decreased. Yet, in making its estimates USDA raised 2012-13 world ending carryover just slightly, up to 82.5 million bales. They did so primarily by adjusting historical data relative to India.

The primary changes were related to (A) world trade and (B) the supply of cotton in India. The world stocks outside China were estimated at 36.8 million bales, a reduction of 790,000 bales on the month. Stocks outside of China are approaching the 2009/10 level of 32.4 million bales. Somewhat befuddling to me, USDA increased stocks in India. USDA has made a number of significant changes in its estimates of the Indian cotton situation all year, which is most unusual given that major changes are being made with respect to the “loss category” and in recalculating data from prior years. This can be viewed as an error factor and is used to force a balance in supply demand. It does not represent actual cotton, but rather a statistical “correction” or “fudge factor.” Its calculation is based on historical estimates.

USDA continues to raise stocks by simply adding them in order to meet its statistical expectations for minimum stocks to meet demand. One could refer to the method as the “SWAG” factor. USDA analysts are the very best in my book; highly professional and most competent. Yet, I fear they are vastly overstating Indian stocks by as much as 3 million bales. More importantly, it is my belief that the market is saying that the stocks estimates are considerably overstated.

The market also received a significant boost from China’s announcement that it would maintain its current cotton policy for the 2013-14 crop. That is, the support price will remain $1.4904 per pound (20,400 Yuan per metric ton). They also indicated that they would continue to buy the farmers crop for the national strategic reserve. Chinese growers reacted very negatively given the high cost of production and expectations of an increase in the support price. They are suggesting that their plantings will be down 5 to 8 percent. This led to a triple digit rally in the futures market as hedge and index funds became major buyers of futures. Some of that luster was lost at the end of the week as traders began to refocus on the liquidation of the May contract and the May options expiry.

Mention is being made that an additional 1.0 million acres will be planted to cotton in the Southwest. It is thought that Texas may now plant 6.0 million acres instead of 5.0. However, those same estimates also assume abandonment of 1 to 3 million acres. Mother Nature will decide that. The Mid-South has all but completed its corn plantings and cotton acreage will get a boost in all the states of that region. Louisiana has completed its planting and Mississippi, Arkansas, Tennessee and Missouri have a maximum of ten days left to plant corn—and it is too wet to plant. Thus, cotton will likely increase some 20,000 to 30,000 acres in each of those states.

Mills are no longer chasing the market higher. However, once the May liquidation is complete then the July call sales will kick in and they absolutely swamp call purchase by a margin of 19,500 contracts to 3,400 contracts. The meaning — mills have a massive amount of cotton that must be fixed (buying futures) in the futures market. The market should have very solid price support.

Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.

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