Cleveland: December Contract Fights Back

By Dr. O. A. Cleveland
Professor Emeritus
Mississippi State University
For Bayer CropScience

The cotton market took it on the chin last week as USDA’s June Plantings Report showed some 13.73 million acres planted in the U.S. this year. The market had expected some 500,000 fewer acres, or only 13.26 million. Nevertheless, all knew that Texas would have a very large increase since the drought had forced land area slated for corn to be switched to cotton. Additionally, for the 14th time in 15 weeks U.S. exports sales were negative. But, this time they were more negative than expected. Net exports were a net negative 96,269 RB.

Nevertheless, December fought through the bearish claws, clung to its trading range, and made a bit of a comeback by week’s end. Actually, the December contract remains well within its long-time trading range of between 113.00 and 130.00 cents per pound. The planted acreage estimate did pressure December to the 115-cent mark, but by week’s end the market was attempting to trade at the 120.00 level. Thus, for now, if this is the worst the bears can throw at the market, then the current trading range will hold and December can move higher into August. By then the market will have a better understanding of the potential harvested acreage in Texas and other drought stricken areas.

Yet, be advised that some are forecasting December futures to fall as low as 85 cents. Notably as well, the ICAC projected last week… “that the Cotlook A Index will decline significantly in 2011/12, although it will probably remain above the ten-year average of $0.60 per pound (2000/01 to 2009/10).”

The market is centered on a combination of two factors: The failure of demand to find a jumpstart and the very questionable size of the U.S. crop. We know Texas is a disaster and will lose a conservative 3.0 million bales. South Alabama and parts of Georgia are also parched, although other parts of Georgia have received friendly showers for over a week. The U.S. crop remains most uncertain, but is beginning to look more and more like only 15.0 to 15.5 million bales.

See the drought index, http://drought.unl.edu/dm/monitor.html.

  
The 100 year drought in Texas has become the worst drought on record.

The full USDA Plantings Report can be viewed at the following site:
http://usda.mannlib.cornell.edu/usda/current/Acre/Acre-06-30-2011.pdf.

The highlights included Texas planting of 7.115 million acres, up significantly from 5.367 million in 2010. However, it was the insurance program that drove cotton plantings and will also lead to the very unusually high abandonment rate. Georgia growers planted 1.45 million acres, up 120,000 from last year. North Carolina growers planted 760,000 acres, up from its 2010 plantings of 550,000 acres. Mississippi increased its plantings to 600,000 acres, up 180,000 from 2010.

The market still looks to hold the 113.00 cent floor and basically “slop” around in the hunt to climb back to the 120 cent level.