Cleveland: Two Dollar Cotton On the Horizon?
February 1, 2011 By Dr. O. A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer Crop Science
In 1980 Hollywood gave the world two all time classic favorites The Empire Strikes Back and The Blues Brothers. There can be no doubt that cotton has “struck back” in the battle for planted acreage, and with a vengeance. Yet the real story comes from Blues Brothers Jake and Elwood’s memorable line, “We are putting the band back together.” So it is—Cotton is putting the band back together and the music is sweeter than ever before.
Prices continue not to just march to higher, but rather in a very proud strut, establishing record high after record high. The expiry of the March contract will find that May jumps up to the current level of March. The pattern will continue through the expiration of the July contract as the July contract will jump up to the May.
I am not one to speak of two dollar cotton, but neither did I even ever think about nine dollar wheat, fourteen dollar soybeans or seven dollar corn…not even in my next life. After all, these are just commodities, nothing more. Yet, the horses pulling the two dollar cotton wagon may likely cross then line. However, don’t, even for a second, think that cotton prices can’t drop like a rock. Old crop prices could drop 30 cents, 3000 points, and the bullish uptrend would still be in force. Thus, be no more surprised to the see the market experience significant price dips than you already have been by $1.70 cotton. In fact, the prudent trader should expect market price volatility to swing from $1.30 to $2.00 plus, basis the March, May and July 2011 contracts.
Domestic demand, export demand, mill call sales, and the uncertainty in both India and China continue to suggest higher prices. Yet, there are a multitude of questions as to whether or not China will run out of cotton. Nevertheless, price, at least up to now, have always rationed supply to prevent the market from “running out.” Thus, prices will go higher.
Running out—Export sales for the week were a net of 532,500 RB of both Pima and Upland for 2010-2011 and for 2011-12 shipment; about evenly split between marketing years. Export sales will have to slow and will not happen until prices move higher.
Additionally, the mill call sales report portends a very bullish scenario. While mills are beginning to pony up to the cash market by paying outright for purchases, it was also noted last week that on call price sales continue to increase. The percentage of unfixed on-call sales versus open interest in the respective contract months is as follows: March 25.7 percent; May 82.5 percent; and July 107 percent. Interpreting: It will be necessary for textile mills to be very aggressive buyers of futures contracts in April, May and June…so much more buying of futures than selling is on the horizon.
The Cotton Council will release its survey of grower planting intentions next Friday, February 4. The survey asks for “intentions,” and actual plantings can be very different in some years. Nevertheless, the survey has proven to be a very reliable indicator. Look for the report to indicate grower plantings intentions between 12.6 and 12.9 million acres. Survey results are as of the January 1 to January 15 (approximate) time period. However, actual plantings, based on today’s prices will likely top 13 million acres.
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