Shurley on Cotton: Where Does This Wild Season Go From Here?
By Dr. Don Shurley
Here’s a quote/scene from “The Andy Griffith Show”:
AUNT BEE: Opie, you need to go next door and see Floyd about a haircut.
OPIE: But Aunt Bee, those little hairs get down my neck and they itch like crazy.
AUNT BEE: Well, after the haircut, go home and take a bath.
OPIE: Wow, a haircut and a bath the same day. This is turning out worse than I thought.
The 2015 cotton crop has had a wild ride thus far this season. By “wild,” I don’t mean big fluctuations in price, because, for the most part, we’ve been stuck in a five-cent range between 62 and 67 cents. Nonetheless, even within this long-standing trading range, prices have been vulnerable to what seems to be a constant barrage of economic and policy forces.
Cotton growers, for the most part, have been patiently waiting on prices to reach 70 cents. Given all the factors that have been in play, things could have turned out worse. But so far, cotton seems to have weathered the storm. Prices are not where we want them to be, but, so far, we’ve stayed out of the 50’s – which would certainly be like Opie having to get a haircut and a bath the same day.
Prices (Dec15 futures) lost roughly three cents during July and continued the slide, bottoming out at 61.79 on August 7. Much of this decline was due to stable July projections for the U.S. crop, events in Greece and Iran, decline in mill use projections for China, and other signs of economic concern about China.
Just when things looked the worst, prices rallied back to the 67-cent area due to a shocking and bullish USDA August report. The U.S. crop estimate was reduced by 1.5 million bales, and the estimates for the China and India crops were also reduced.
On this rally, talk of 70-cent cotton immediately resurfaced. But, as I said at the time, there was no basis for that without the market first proving it could negotiate the hurdle at 67 to 68 cents. Prices failed to do that, but the recovery to 67 cents made us feel better, nevertheless.
But, from August 24-26, we’ve lost all the bullish gains made following the August report. Prices have thus far dropped 440 points (4.4 cents per lb.) this week to close at 62.51 cents on August 26 and up slightly to about 63 cents on August 27.
This week’s implosion was due to concern over China’s economy, losses in the Chinese stock market, and related fears and concerns that caused the U.S. stock market to also tumble. The U.S. stock market appears to be trying to regain its composure and recover some of the loss.
Markets are governed by information (some of it factual, some not) and emotion. Emotions can sometimes override fact. When that happens, the market will often “correct” itself.
So what does all this imply for cotton?
USDA’s September numbers may impact price. Some observers feel the August numbers were too drastic a cut and that the September estimate could be larger. I don’t know about that. I see no evidence in terms of crop conditions, etc., that would cause USDA to make much change.
All eyes continue to be on China mill use and crop size. With the events of this week, everybody is “super sensitive” to China. Sensitivities aside, the same issues still apply – prices will depend on China’s demand for imports (quality cotton, more precisely).
A reminder that, as a grower, your cotton “total money” is determined by not only what futures prices are doing, but also basis, fiber quality premiums and/or discounts, and LDP’s/MLG’s and/or equities. Evaluate your marketing alternatives and make decisions based on the “total money” available or likely available and the risks in making the decision versus not making it.
Prices appear most likely to still settle in the 62 to 67-cent range. Prices could break below 61 to 62 cents, however, and could still attempt to push 68 to 70 cents – all depending on the unknowns over the next couple of months or even longer.
Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia