Shurley on Cotton: November Numbers Mostly Neutral, Prices Hold
November 11, 2014 By Dr. Don Shurley
USDA’s November crop production and supply/demand numbers were released November 10 and are little changed from the October numbers.
Reports seem to suggest the numbers were taken as bearish – a view without much validity. Prices (Dec14 futures) dropped after the report, but have thus far rallied back to near pre-report levels.
Dec14 is currently at 63 and change thus far today (November 11) – up from the November 10 close at 62.43 cents. Prices continue in a range of mostly 62 to 65 cents. The market (Dec14) is giving the appearance of strengthening support as the bottom appears to be firming. But beware – anything can still happen. While the bottom appears firm – and that would be good news – the top looks also to be firm, and there just seems to be no new fresh economic fundamentals to yet push prices higher. Higher prices, to be sustained, must have a buyer, and buyers just don’t appear ready to jump on board.
In the November 10 numbers, the U.S. average yield was increased from 790 to 797 lbs/acre, and the crop increased slightly from 16.26 to 16.4 million bales. No other changes were made from the October U.S. numbers. U.S. ending stocks were raised from 4.9 to 5.1 million bales.
The estimate for the Chinese crop was lowered a half million bales, but expected total foreign production was raised just slightly. Chinese mill use was also lowered a half million bales, matching the expected reduction in the crop. World use/demand, however, was raised 170,000 bales.
World ending stocks were raised 250,000 bales, but this was accounted for mostly by the U.S. Chinese ending stocks were unchanged from the October report.
The LDP/MLG in effect for the week ending November 13 is 2.64 cents per lb – up from 2.43 cents the previous week. Given the decline in prices since last spring, forward (fixed price) contracting of this year’s crop was, in hindsight, probably less than what producers wished they had done. Reports seem to suggest that selling is picking up this fall due to the availability of an LDP.
In the Southeast, the LDP plus cash sale of the cotton is currently totaling a little over 65 cents for 41-4/34 and about 68 cents for 31-3/35.
The basis for better quality cotton has been strong. The cash/spot Southeast price for cotton grading 31-3/35 is currently +225 points December futures. This is 275 points higher than the standard 41-4/34.
If the bottom of the market is in (and that’s a risk growers will have to access), prices should eventually improve. If growers take the LDP, those bales are no longer eligible for Loan, and storage costs will accrue if cotton is stored rather than sold. If they decline the LDP and store cotton in Loan, how they eventually end up will depend on what futures prices do, what the basis does and the MLG available at the time.
Alternatively, growers could take the LDP and sell the cotton and be done, or buy a Call Option.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia
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