Shurley on Cotton: Hitting a Wall at 65 Cents
By Dr. Don Shurley
While cotton futures prices are still in the long-standing 62 to 67 cent trading range, prices made a nice recovery over the past few weeks.
Prices (March 2016 futures) have rallied from the 60-cent threat back in October and from just below 62 cents on November 23, to almost 65 cents on December 9 before faltering 104 points (1.04 cents) on December 10.
That disappointing decline is likely due simply to some of the bullish energy running out after the nice uptick we’ve experienced recently, a not so encouraging export report, and perhaps the December USDA production and supply/demand numbers.
Export sales for the week ending December 3 were 85,500 bales – down over 200,000 bales from the record of the previous week. I don’t view that as negative per se; you’re not going to have a high level of sales every week. Shipments were 115,000 bales, compared to 90,000 the previous week.
USDA released its December numbers on December 9. Prices went to near 65 cents that day, but then retreated the next day. The U.S. crop estimate was lowered 250,000 bales, and average yield was lowered from 782 to 768 lbs/acre. The estimate of exports for the 2015 crop year was lowered from 10.2 to 10.0 million bales – this likely being just a reflection of the lower crop size and reduced exports and demand worldwide.
World cotton Use (demand) was lowered to 111.39 million bales – the fourth consecutive month that Use has been revised downward. Whether this represents an actual reduction in Use or USDA just fudging an earlier number, it shows that demand is weaker than anticipated. Use in China was revised down by 500,000 bales, India down 200,000 bales, and Pakistan down 150,000 bales. However, Bangladesh was revised up 200,000 bales, and Vietnam up 450,000 bales.
World production was dropped almost 2.0 million bales, with reductions coming in not only the U.S., but also China, Turkey, and Pakistan. Projections for the India crop were unchanged. Overall, projected world ending stocks for 2015-16 were lowered 1.7 million bales, including 450,000 bales in China.
China’s projected imports were lowered 250,000 bales to 5.5 million. This probably coincides with the lowered expected Use.
As mentioned, the U.S. crop was reduced by 250,000 bales. Most states held to their November estimate. A few saw yield estimates increase. Yields in the Southeast, with the exception of Georgia however, have tumbled from earlier projections. Most notably, the Carolinas and Virginia have been hit hard in yield and fiber quality by weather and harvest delays. This season in Georgia, and particularly as the harvest and classing has progressed, we are seeing higher than normal deductions in grade for seed coat fragments, prep, and color grade. Micronaire is also higher than normal. High mic is typically caused by plant stress.
Growers are reminded that the LDP (or POP as it’s often called) acts as protection against low prices. The LDP is received in lieu of putting cotton in the Loan. If the Adjusted World Price (AWP) is less than the Loan Rate, that’s what generates the LDP, and that also means that cotton can be stored in the Loan, free of cost to the grower. If you take the LDP and then continue to hold cotton in storage, you have no protection from prices going lower and you also accrue storage charges. If your plan is to hold cotton for higher prices, you would likely be better off to just put the cotton in Loan rather than take the LDP. With the cotton in Loan, if the AWP remains below the loan rate, you’ll have a MLG (Marketing Loan Gain) – the math works exactly the same as with the LDP.
Here’s what the LDP has been doing each week since the beginning of October. Prices and the LDP move in opposite directions. The LDP goes up, because prices have gone down. The LDP goes down, because prices have gone up. If you take the LDP, to play that game, you need to understand the timing of what to do. You need to be prepared to sell those bales or, otherwise, just recognize that you no longer have protection for declining prices, and you’re incurring storage charges.
Most recently, for example, the LDP was 4.05 cents/lb for the week ending December 4. It dropped to 2.96 cents December 11, because prices were higher than the week before.
Capturing the most money in your pocket is the result of timing. If prices are going up during the week, you can be assured that the LDP will decline for the following week – they will offset. So, the only way you can gain is to be prepared to take the LDP and sell those bales while the market is up and before the LDP can adjust down.
If prices are trending down during the week, the best strategy is to just hold off, because the LDP will be higher the next week. The LDP is your friend. If prices are going up during the week, you could take the LDP and sell those bales while prices are up and while the LDP is higher, before it goes down the following week.
Assuming premiums for good quality cotton, here’s what the total money looks like presently:
This total is 2-3 cents less than what it would have been on December 10 or on December 9 before the market went down and before the LDP went down on December 11.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia