Cleveland: A Volatile Week for Cotton Prices
March 1, 2011 By Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
Cotton prices took it on the chin all week, that is, until the final round when the market posted another limit up day. With the nearby May contract near the 185.00-190.00 level and December 125.00, the price uptrend remains. Likely this week’s price slippage was nothing more than just another momentary pause necessary if the market is to test another run back to two dollars and above. The market’s sharp drop, after spending two days above two dollars, should not be viewed as the market high, or should it?
A long time ago, back in November, I though the market high was in. That thought did not last long! It is doubtful that anyone can justify now making the comment. Volatility is the highest on record as more than half of the days over the past near three months have had limit moves. One has to expect many more of the same With on call sales (already known mill buying, i.e., buying futures) already accounting for ninety percent of the July open interest and a very significant chunk of the May open interest as well, the market remains fundamentally very bullish. Bottom line; let’s take old crop on another challenge of the previous highs above 211.02. A climb back to the December high of 135.56 will be a bit more challenging, but the bull still rules the December contract as well. Any return to 130.00 should generate producer price fixing.
The prior week’s run above two dollars continued to uncover mill buying. Thus, while price rationing has occurred, demand continues strong at current and higher prices. Net export sales of Upland during the week of two dollar prices totaled 258,600 RB. Sales for the current marketing year were 70,300 RB and sales for the 2011-12 season were 188,300 RB. The primary buyer for both marketing years was China, suggesting that domestic Chinese demand will be revised higher by USDA.
Growers continue to ask, “How long will these prices last?” That is the appropriate question, but the answer is a big unknown. Yet, two dollar old crop and 125.00 new crop makes it apparent that the cotton market is begging for land area. Oilseeds and grains have faced the same dilemma since 2007. Cotton has finally scaled the same high price mountain. Given that world carryover of oilseeds and grain is as tight or even tighter than cotton, those crops will continue to be reasonable alternatives and will battle for acreage. However, cotton is more than ready for the challenge and it will take a minimum of three crops to rebuild cotton stocks to the level necessary to relieve the fundamental tightness of stocks. In fact, December 2012 should be expected to trade at least to 120.00. In fact, assuming “normal” weather in the cotton, oilseed and corn belts, the December 2012 could well see at least 125.00—135.00. However, a word of caution; Mother Nature has not had her say with the 2011 crop, much less the 2012 crop. Mother Nature, according to long range weather forecasters, who have been very accurate the past 18 months, suggests the cotton belt will be abnormally hot and dry through August.
While I am not foolish to already write of the 2011 crop as somewhere from a disaster to lower than normal, I am very confident that the cotton market will go toe-to-toe, head butt- to-head butt and punch for punch with the oilseed and grain markets through at least 2013 crop. To paraphrase Senator John McCain’s, “drill, drill drill,” growers should give serious consideration to, “plant, plant, plant.”
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