Cleveland: What to Make of Last Week’s Price Rally?

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The day October 19, 2012 will go in the books as the very last day of any type floor trading (open outcry) for cotton. The New York ICE contracts have all been moved to a computer trading.  That is difficult for us old heads, but hopefully it will be better.  Yet, there are considerable concerns of transparency.  History, and possibly government, will be the judge. 

Nevertheless, it was a joyous week for the cotton bulls. In the absence of any fresh news the market began moving on Tuesday with good volatility and trading volume. Traders apparently decided the market had overdone all the bearish news of the past 90 days and decided to flip the buy switch. You will recall my timid bullishness last week on the heels of another huge bearish USDA supply demand report. It seemed my views had been totally run over by the market. Finally, all the bullish thoughts surfaced on the trading floor (or maybe they surfaced in the screens/monitors) as the December contract settled 522 points higher and hinted that the price bottom for the 2012/13 marketing season is in. That is, 70 cents is just too cheap for cotton, especially since international spinners are now making money.

Concerns surrounding the near historic low level of certificated stocks, coupled with the poor quality of a majority of the U.S. crop classed to date, were credited with lighting a fire under prices. Cotton classing data indicated that only about 45 percent of the crop could hope to meet certification quality requirements. The Midsouth and Southeast have noted high micronaire. The Rolling Plains crop, while in the premium mic range, is shorter than expected; the average staple length out of the Abilene office was only 33.6. Some 75 percent or more of the Oklahoma crop has suffered from high mic.

As the market moved higher, mill fixations became extremely heavy and drove prices even higher. The rally gave much of the appearance that it was feeding on itself as mills all but panicked in getting their fixations done (buying of futures).  Adding more fuel to the fire were the positive retail sales and housing starts reports, both excellent barometers of cotton demand.  

Then, there is always China. The idea that Chinese spinning was not as bearish as has been forecast also gained more attention. The cotton industry appears somewhat fixated with the idea that China will be only a minor buyer of cotton this year.  (They do have some 73 million bales on hand. They will use 36 million of those during the 2012/13 marketing year leaving some 37 million in carryover stocks as of July 31, 2013–a full year of supply in carryover.) However, Chinese buying continues. In fact, it is ahead of last year’s pace. With New York below 75 cents it is still cheaper for the Chinese mills to buy cotton from the U.S., pay the 40% penalty to the Chinese government for buying without an import license than it is for the mill to buy domestic Chinese cotton.  

Too, don’t forget that it is the oilseed and grain complex that is driving prices.  With the world food supply still below desired carryover levels, those crops will continue to demand a price premium and win the battle for acreage. Yet, cotton must still compete at some level. Cotton at 70 cents is far too cheap. 

Nevertheless, with world cotton carryover expected to total near 80 million bales, there is a hard price hat on this market. Growers should look to do most of their pricing in the high 70s.  Don’t let this rally get away without doing some pricing.  Mills should be 100 percent covered for the 2012/13 year. 

Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.

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