Shurley on Cotton: Looking Once Again for 4-Wheel Drive
By Dr. Don Shurley
Cotton once again seems to be meandering in the muck and mire and going nowhere. The recent rally to near the 65-cent area fizzled out, and prices have since retreated back near the “old support” area of roughly 62 cents.
December futures actually closed the week on a good note – at 63.32, up 100 points for the day and up 56 points for the week.
Assuming the recent decline all the way to 60 cents will not be repeated (assuming the market has now “corrected” that error in its thinking) and assuming the old and now-renewed support at near 62 cents can hold, the market appears to be negotiating a narrow trading range of mostly 62 to 65 cents.
There has been some discussion among analysts lately of the “spread.” This is the difference in futures prices between various contract months. This spread is typically positive and, among other things, reflects how much more or less the market is willing to pay for the commodity in the future versus right now. It can be a signal to the producer that the market wants the crop now or later.
Currently, March is at a discount to December. May is a 60-point premium to March; thus the December-May spread is +28 points, and December-July is +63 points. These spreads will change (narrow or widen) over time, and – again – is a signal of the market’s demand for the crop or lack of it. The current spreads alone do not warrant holding cotton. A profit from holding the crop will have to come from an increase in price and/or an improvement in the basis. Of course, if in the Loan, the AWP and MLG also come into play.
As we enter November, there are still uncertainties about the quality and eventual size of the U.S. crop. The October USDA numbers did not include the impact of heavy rains in the Carolinas and Virginia. There is also now uncertainty of the impact of rains that have recently moved through west Texas and across the Mid-South.
As of October 25, the crop was pretty much on target or ahead of normal in development. With Kansas as the lone exception, the cotton in all other states is very near or ahead of normal in bolls opening.
As of October 25, harvest was behind schedule, most notably in Georgia, Oklahoma, the Carolinas and Virginia, and Tennessee. The Louisiana crop is rated 21% poor to very poor, North Carolina 25%, and South Carolina 34%. The Texas crop is 62% fair or worse. So, there is still uncertainty and concern about crop size. Whether this will materialize into a further boost for prices is anybody’s guess at this point. USDA’s updated numbers will be out on November 10.
The basis and fiber quality premiums in the Southeast remain strong. The basis for 41-4/34 is +25 points December, and the premium for 31-3/35 is +325 points. The premium for 31-3 with a 36 staple is +400 points.
The LDP/MLG for the week October 30 through November 5 is 4.86 cents – up from 3.63 cents for the week ended October 29. The “total money” from taking the LDP and selling 31-3/35 is currently 71.68 cents per lb., based on the October 30 close.
The “total money” will increase if December futures increase during the week. If December goes down, the LDP/MLG for the following week will go up. Hold off and reconsider the following week.
U.S. fiber quality has been at a premium, especially for the last two crop seasons. This is expected to continue, but it is uncertain for how long and for what price. Thus far, color grades are better in the Mid-South compared to last season, while color grades in the Southeast and in Texas are, to date, not on par with last season.
In most states, staple appears to be as good as or better than last season, with the exception of the Carolinas, Virginia and Florida. Louisiana is also running shorter than last year.
Uniformity is running a little lower in North Carolina. Strength is also lower in the Carolinas and Virginia. High micronaire, caused most often by plant stress, is also a problem compared to last season in the Carolinas and Virginia, and in Louisiana and Mississippi.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia