Shurley on Cotton: Fragile Market Shows Improvement, Outlook Still Cautious
By Dr. Don Shurley
Cotton prices (Dec14 futures) bumped 65 cents this week. After recently falling to the 61-cent level, prices have made a modest, but still welcomed, recovery. The resistance or “ceiling” at the 67 to 68 cent area is likely pretty firm and will be difficult to negotiate in the near term without major changes in the supply/demand picture. Likewise, any “floor” appears fragile, and we can only hope the 61-cent area holds.
Dec14 is up slightly at 64 and change so far (October 10). Prices closed at just over 65 cents earlier in the week, but then fell for two consecutive days. It looks like we’ll be up about two cents for the week. Reports seem to suggest that the improvement is at least somewhat due to tight old-crop supplies, weather delays in harvest in some areas, and fiber quality concerns. But underlying these positive factors are still some negatives – a disappointing export report this week and continued uncertainty about China cotton policies and potential demand for imports or lack thereof.
USDA released its October production and supply/demand numbers on October 10. The U.S. crop was lowered to 16.26 million bales – down 280,000 bales from the September estimate – and the U.S. average yield was lowered from 803 to 790 lbs/acre. There were no other changes in the U.S. numbers.
The World numbers were a mixed bag. Beginning stocks (carry-in from the 2013 crop year) were raised 1 million bales, and 2014 production was also raised over 1 million bales. But, Use was raised just over 1 ½ million bales. So, on balance, this resulted in an increase in projected 2014-15 ending stocks.
The India crop was raised 1 million bales. The China crop was also raised 1 million bales, and Pakistan was raised 300K bales. Projected Chinese imports were lowered from 8 million bales estimated in September to now just 7 million bales. Most observers were waiting to see how USDA would adjust imports based on China’s recent policy announcements. China’s Use was increased 1 ½ million bales from the September estimate.
An LDP is available when the Adjusted World Price (AWP) is less than the Loan Rate. The LDP available for the upcoming week is 2.29 cents/lb. Upland cotton is eligible for an LDP, provided the producer still has “beneficial interest” in the cotton. This includes cotton already contracted, but the terms of the contract will determine when beneficial interest is lost.
Have the contract reviewed by FSA. The LDP is received in lieu of placing cotton in the Loan. Any bales receiving an LDP are not eligible for Loan. You can apply for the LDP even if the cotton is still in modules. Take the producer portion of the module tag to the FSA office. Otherwise, after the cotton is ginned, take the gin bale listing to FSA. You’ll also be required to sign some forms and have all this done by the close of business on Thursday to lock in the LDP for that week.
The LDP will increase if the A-Index declines; the LDP will decrease, otherwise. If cotton is instead placed in Loan and the AWP is less than the Loan Rate when the Loan is redeemed, a Marketing Loan Gain (MLG) is realized based on this same math.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia