Back to the Fundamentals
January 27, 2011 It’s been noted, but is worth repeating with emphasis, that the bulls that are driving today’s explosive upside movement in the cotton market are not the same ones that pushed prices above $1 per pound in the spring of 2008.
In 2008, when compared to today, there was almost no fundamental reason for the price spike. There was a glut of cotton in 2008 — the stocks-to-use ratio was at an almost unmanageable 55% — and a worldwide recession was beginning. Basically, that rally was hedge fund and speculator driven, and turned out to be a house of cards. When the funds and specs liquidated their long positions, the market collapsed and futures prices fell by 50 cents per pound to 50 cents per pound.
But it’s back to the fundamentals now. The November 9 USDA supply and demand report reduced U.S. carryover to a critically low 2.2 million bales, down 500,000 bales from the October report. It raised U.S. exports to 15.75 million bales, up from 13.3 in 2008/09. And the market reacted — the ICE December 2010 contract put in an all-time record high of 157.23 points that day, while the December 2011 contract hit its life-of-contract high of 100.62 points.
Dollar Cotton in 2011?
The question now is what happens in 2011? Certainly the fundamentals are in place for a continued bullish sentiment. Dr. O. A. Cleveland, Professor Emeritus, Mississippi State University, notes that the Chinese crop could be as much as 3 million bales lower than the current USDA estimate, while the country’s demand is at an all-time high. India is having problems delivering on export commitments.
Obviously, acreage will be price driven and 75 cents per pound has generally been considered a point at which growers would traditionally fill the planters with cotton seed and grease up the pickers. But soybean and corn prices have been equally strong. On November 15 on the Chicago Board of Trade (CBOT), soybeans for November 2011 were just under $12 per bushel, and CBOT corn for December 2011 delivery was just over $5 per bushel.
“Look for new crop to scale the dollar ladder as the 2011 planting season approaches,” wrote Dr. Cleveland in his weekly Bayer CropScience newsletter in early November. “Grain merchants and elevators have made a significant push over the past few weeks to get growers to forward contract 2011 grain production. I have never known elevators to brow beat growers to forward contract.
Elevators are very aggressive and this aggression comes well before the typical planting horizon for planting decisions. The battle is on. The cotton market has fired its first shot.”
And then there is the weed-resistance factor. Some areas of the Mid-South have seen resistance to Palmer amaranth grow to the point that growers are reluctant to plant cotton on those acres. With all commodities at extraordinarily high prices at the same time, growers now have the opportunity to rotate crops, without having to sacrifice profits, to better manage resistance.
Still, considering all factors, it comes back to the futures, and the futures have never been better for cotton in 2011.
GET THE NEWSLETTER TODAY!
