Shurley on Cotton – Prices Again Try to Consolidate

By Dr. Don Shurley

 

What will it take for prices (Dec14 futures) to finally find a level of support? And by support, I mean a level of prices low enough that the majority of market sentiment will finally say “that’s enough” and turn the outlook more bullish than bearish.

Since mid-late May, prices have broken sharply downward three times. The most recent time was July 23-31 when prices dropped from roughly 68 cents to just under 63 cents.

Each time, prices have tried to consolidate or find some support. On the two previous occasions, however, that support failed to hold as more price-negative news or technical considerations eventually forced prices lower.

Dec14 closed at a contract low of 62.87 on July 31. Prices have attempted to stabilize and are currently around 64 cents today (August 8). The unknown is whether or not this latest support will finally be the one to take hold or will prices get knocked down for a fourth time.

The supply-demand market factors in play right now include:

  • Better U.S. crop conditions and less acreage abandonment than previous years.
  • Expected U.S. crop of 16.5 million bales compared to 12.9 million last year.
  • U.S. exports are expected to be 10.2 million bales – actually on par with last season, but this is overshadowed by the increase in production.
  • China acreage and production will be down, but China will import only eight million bales compared to 13.5 million last year due to large stocks.
  • The India crop is also expected to be down.
  • World cotton use will be up from last year, but the outlook is for smaller than expected growth.
  • Weekly export sales numbers

Some of these factors are potentially bullish and could be reason for prices to improve if current expectations are not realized.

The market has been relatively quiet and prices have tried to form some support. USDA’s August numbers will be released on August 12. If the U.S. crop forecast is above the current 16.5 estimate, prices could take another hit.

If prices do not improve into harvest (or even if they do, it likely won’t be to a level most growers would be happy with), alternatives would include placing cotton in Loan, deferred price contract or purchasing Call Options – all in hopes that the market improves.

 

 

Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia

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