The cotton market turned bearish on news that USDA could again make upward adjustments in the size of last year's Chinese and Indian cotton crops, reducing China's import needs and correspondingly, U.S. exports. In addition, fears continue to swirl around the equity markets.
Longer term, the outlook brightens, according to experts at the Ag Market Network's Aug. 14 teleconference, as cotton prices must move higher to attract acres for the 2008 crop. All this comes on the heels of USDA's Aug. 13 crop condition report showing the Mid-South and Southeast cotton crops starting to show signs of damage from heat stress, with the lowest condition ratings in six weeks.
USDA's August estimate of U.S. cotton production of 17.3 million bales was well below expectations, but the market didn't look long in that direction, according to Mike Stevens, Swiss Financial Services. “The cut in U.S. exports and corresponding decrease in projected Chinese imports shifted the report to the bear side.”
USDA lowered total U.S. exports for new crop about 300,000 bales from the July estimate of 17 million bales. USDA also lowered domestic use slightly; ending stocks dropped by 100,000 bales, to 5.8 million bales.
“Technically, there is no other way to say it. The market looks poor,” Stevens said. “You can't call it any other way. All the major moving averages are now pointing lower. As of yesterday, the nine-day moving average started to cross under the 40-day moving average. That's not good.”
Carl Anderson, professor, Extension specialist emeritus, Texas A&M University, concurred. “That's a very good signal that the market is technically weak. But those signals are not coming from the 2007-08 crop. When the market turns to 2008, we'll see a whole different situation develop.”
Stevens noted that December 2007 cotton futures prices (around 60 cents) as of Aug. 13 represent a 50 percent correction of a recent nine-week run from contract low to contract high. “If that holds, look for a trading range of 60-64 cents. If that area doesn't hold, you have to look at around 58 cents, with the high end of the trading range around 62 cents.”
Stevens and Anderson agree that getting the market to the upside will require an increase in export demand. But for now, “the Chinese are stretching their inventories much better than anyone thought they would,” Stevens said. “As a matter of fact, some of the smaller mills are slowing production waiting for new crop to come in.”
As soon as that happens, “I think we'll get blown out of the water. So our window of opportunity is not as wide open as we thought it would be when we were thinking we were going to be the residual supplier.
“The market also needs a case of bull fever by the funds. We need those outside markets, including strong stability in the equity market. The stock market really frightened people when it started falling and most analysts feel like we haven't seen the worst of it yet.”
“We see a lot of opportunity for cotton producers to plant more grain next year as long as December 2007 futures continue to hold around a 60-cent level,” Anderson said. “At the end of the 2008 crop, we could see ending stocks drop down to 3 million or 4 million bales, and there won't be a residual supply. That could make a big difference in the world market.”
“Cotton must keep up or lose more acres,” Stevens said. “If that's the case, with $4 corn and $9 beans, which is what you've got with the 2008 contracts, December cotton is cheap at 68 cents.”
World fundamentals should improve in 2007-08, according to Anderson, who noted that world cotton production, estimated at 116 million bales, and world cotton use, projected at 127 million bales, “would create a gap of 11 million bales. Production could easily get to 118 million bales to 119 million bales, or drop to as low as 114 million bales. That is what is going to drive the fundamentals of the market.
“World stocks are expected to decrease by about 6 million bales this year (from nearly 58 million bales to 51.2 million bales). We're getting to where stocks are tight enough to make a difference. The bias today is that this market is trying to find a bottom. But given the speculative element and the bullish attitude for speculators, it won't take much to move this market very fast. So I want to caution everybody, try to keep positions in the market that are relatively safe and low risk as insurance against a sudden price move.”
Anderson stressed that import demand can shift quickly and prices can move up. “Don't get caught in that situation, especially with straight futures. Options are so much safer. They may be a little more complicated and may require more near-term money.
“But I certainly would advise everyone, from the producer to the merchant to the mills to keep a very close eye on this market. We could see some very big changes to the upside over the next 12 months. I'm surprised this market is not looking down the road already. In my visits with producers, cotton prices have to go up or we're going to lose some acres.”