Shurley on Cotton: Prices Just Treading Water

By Dr. Don Shurley

Old crop (March15 futures) prices continue to travel sideways. The market seems happy to move in a range of mostly 59 to 62 cents. There seems to be support at 59 to 60 cents and a hard ceiling at 62 cents.

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March15 closed at 59.73 on January 12 – skidding 103 points and back below 60 cents after trading above 60 for much of the past month. This might deflate some of the optimism we had going for a while. But frankly, it just continues and even further solidifies the sideways pattern this market has been in for quite a while.

USDA released its January production and supply/demand estimates earlier this week. The numbers are being interpreted as somewhat negative to the market. The U.S. crop was raised 160,000 bales, and U.S. ending stocks were raised 100,000 bales. There were no other changes to the U.S. numbers.

China mill consumption was lowered 500,000 bales, raising China ending stocks by the same amount. The Pakistan crop was raised 400,000 bales. Overall, World production was raised about 200,000 bales, mill use was lowered 360,000 bales, and ending stocks raised another 560,000 bales, with most of that being in China.

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The LDP/MLG currently stands at 4.87 cents through the close of business on January 15. The LDP/MLG increased for this week due to decreased prices the previous week. It is not clear that total money received from “POPing” the cotton and selling is necessarily increased when the LDP increases. Typically, the POP/LDP/MLG increases because prices decline, and thus, the total money received is not necessarily increased.

One strategy is to take the LDP/MLG and sell the cotton during a week when the market is making a good run and before the LDP/MLG adjust downward the following week.

New crop (December15 futures) prices are currently at 63½ cents. U.S. acreage will decline for 2015, and U.S. and World production will likely decline. This should provide support for prices, but improvement may be slow as mills seem reluctant to purchase cotton much above current levels. If acreage is reduced and production problems occur, that could spark better prices – but that’s months down the road.

I see little incentive to do price fixing until we get to 70 cents. If you believe prices are at or near the bottom, one strategy would be to buy March16 Call Options while you’re waiting for things to get better.

 

Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia

 

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