Shurley on Cotton: Prices Finding More Support and Momentum

By Dr. Don Shurley

Cotton has had a relatively good last couple of weeks.

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Prices (March 2016 futures) seem to have found increasing support around the 62-cent level. Sixty-two cents is nothing to get excited about, but firming up the floor in what remains a very volatile and uncertain market is a good thing.

While a more solid footing is welcome, there will be some resistance to prices breaking the downtrend line of lower highs. Prices on November 27 pushed to the 64-cent level, and that’s a level we’ll need to break through if we expect to continue on to the 66-cent level or higher, as some analysts suggest might be in our future.

In what was an eventful week, prices (March 2016 futures) finished on a strong note. Will this carry forward or succumb to resistance at 64 cents?

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On November 23, prices went as low as 61.45 cents – the lowest level since October 9. On November 25, prices moved in a wide range of 181 points, going as low as 61.85 before rallying to close at 63.38 before Thanksgiving. In a short trading day on November 27, March 2016 closed at 63.93 – up another 65 points from two days earlier and up 110 points for the week and 228 points since November 6.

Concerns continue to mount about U.S. crop harvest and impacts on fiber quality. This has likely been a factor in price movement last week.

As of November 22, the U.S. crop was 70% harvested. Texas was only 60% harvested compared to 75% normal; Georgia 64% harvested (16 points behind normal); North Carolina 14 percentage points behind; and South Carolina 26 points behind. This past week saw precipitation of mostly ½ to 1½ inches through Texas and Oklahoma, with heavier amounts through Arkansas and Missouri. Freezing rain and ice was reported in the Texas Panhandle. In the Southeast, the cotton areas of North Carolina had about 1 inch of rain. Light to moderate rain is expected pretty much throughout the Cotton Belt this week, except for the West and the Texas Plains.

Another factor in better prices has been exports. For the week ended November 19, upland export sales totaled 267,000 bales – up 38% from the previous week and a high so far for the 2015 crop marketing year.

The basis in the Southeast continues to be very strong – currently +125 points the March futures for 41-4/34 and +325 points premium for 31-3/35.

The LDP for the week ending December 3 is 5.11 cents/lb. If prices go up this week, the LDP will decline effective December 4. Your strategy to maximize total money (taking the LDP and selling the cotton or loan plus merchant equity) is to take action while the market is increasing but before the LDP adjusts downward. If prices are going down during the week, hold off, because the LDP will increase the following week.

The total money from the LDP plus spot sale is currently about 73½ cents/lb for 31-3/35 basis March 2016 in the Southeast. Deducting warehouse and storage charges, the equivalent equity is estimated to be about 18 to 19 cents.

If you still hold uncommitted cotton, downside risk appears limited, but price portions of the crop on rallies or take the LDP, sell, and purchase Calls.

 

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

 

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