Old Crop Prices Remain Volatile; Weather Holds the Key for New Crop

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The New York spot contract scared the 52-week high of 93.75 cents in last Friday’s trading, as May futures traded to 93.60 cents in the morning session. While demand at 90 cents remains reasonably consistent, it is the large volume of unfixed mill call sales that underlie market strength.

I stated some time ago that mills were in position to get burned, and the fire is only coming closer. They have just over two weeks left in fixation trading on the May contract, and then only some seven/eight weeks of trading on the July. Additionally, while mills have had the ability to roll positions forward, they essentially must fix all contracts by early June. Thus, this will be their last time with the option of rolling contracts to a forward month, and the fire is already burning some of them.

The market is looking to move above 94 cents, then jump to 96 cents, and possibly 98 cents. Yet, I would not hold my breath looking for 98 cents. Do that, and one is likely to awaken choking on 86 cent cotton. As to how much the new crop December might tag along with the May contract, my guess would be no more than 80.50-81.00 cents. The new crop will be led by weather developments, not old crop prices.

Others suggest it is the Chinese policy that holds the answer for the December contract. While the Chinese will likely attempt to discharge an inordinate amount of low quality cotton, that action should not act as any significant drag on market prices.

I am fully of the opinion that weather holds all the aces and face cards to determine the price level of the December contract. In the absence of very timely rains throughout Texas during the spring and summer – particularly in the High Plains and Rolling Plains – then the December contract will move higher. However, for now that remains a weather play. There is an increasing belief that the new crop December is undervalued at 80 cents, and it may be. However, only Mother Nature’s moisture – or lack thereof – holds the key.

As futures have moved higher, so has open interest – an indication that speculative money is coming in on the long side of the market. This will likely continue to push the market higher. Yet, be prepared to see a sharp selloff. I am very much of the opinion it will occur within the next five to six weeks. The real question – and the one I cannot answer – is “Will the selloff occur at 96-98 cents and drop to 86-88 cents, or will it come at 94-95 cents and drop to that same 86-88 cents?” That is, once the bulk of the mills fixations are in, the speculative funds will then take their profits, and the market will drop like a lead balloon.

Net export sales during the 90 cent week totaled 50,800 RB of Upland for current year delivery, 4,000 RB of Pima and 135,900 RB of Upland for 2014-15 delivery. Weekly shipments were a very strong 345,000 RB (329,000 RB Upland and 16,000 Pima). With spring now officially in the air, weekly shipments should continue to average above 300,000 RB. Total commitments at 91 percent of the USDA export estimate of 10.7 million bales are in line with the historical average of 93 percent for this time of year.

Higher prices are in the air for old crop, but be prepared for a very volatile market. New crop has a very, very heavy 80-82 cent cap on its head, at least until later in the spring.

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