Shurley on Cotton: Prices Heading Toward “Testing Ground”
By Dr. Don Shurley
As we get closer to beginning to put the 2015 crop in the ground around most of the Cotton Belt, prices for both old crop and new crop are improving – as we thought and hoped they would. Old crop May futures approach 67 cents, and new crop December is at roughly 66 cents.
Sometimes, marketing is about picking your battles and knowing when the odds are in your favor. No one knows with high certainty what the market will do. All you can do is sell and make decisions armed with the best information available, manage risk, and profit to farm another year.
I believe in two strategies – (1) sell the crop in portions as the market dictates, and (2) reward the market by selling when the market improves and puts the odds in your favor.
Old crop has clearly broken through what was considered a ceiling at 65 cents. This is always considered a positive sign that the market has strengthened. This improvement has been largely fueled by continued strength in export sales, shrinking stocks outside of China, and U.S. and other weather concerns. There is opinion/belief that old crop prices will likely continue to trek higher, particularly for good quality fiber. Such a move would be a “testing ground” for prices. Prices haven’t been above 65 cents for any sustained period of time since last August and September. My advice – pick your battles.
The April USDA monthly production and supply/demand numbers were ho-hum, but there were some surprises. We’ll have to see if this slows the bull down some. As expected, the U.S. crop was increased slightly from 16.08 to 16.3 million bales. Most analysts also expected to see, however, an increase in the export number. That didn’t happen. Projected exports for the 2014 crop year remain at 10.7 million bales. U.S. ending stocks were increased from 4.2 to 4.4 million bales.
Total World numbers for 2014/15 were essentially unchanged. Worth noting was that China’s imports were increased 200,000 bales, and China’s ending stocks were increased slightly. Reports have circulated recently citing a reduction in price support for Xinjiang, a major growing region. Reports have also suggested China cotton acreage and production to be down 20 percent this year. The major question is this – will this mean Chinese mills will utilize more of the country’s stocks and/or does it mean China will still have a reasonably good demand for imports of quality cotton? I believe this is key to 2015 crop price direction.
New crop prices (Dec futures) have improved. We stand at roughly 66 cents today. Improved prices – although still not where we would like them – delays in planting of corn and other alternative crops, and changes in relative crop prices are already leading some observers to think that actual acres planted will be higher than the 9.55 million number released by USDA on March 31.
Current strategies for 2015 include waiting for prices to improve further, purchase of December Put Options while we have these better prices, or purchase of March Call Options, particularly if prices weaken from current levels.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia