The eyes of the cotton market will be on Texas acreage and weather this spring, as that state’s producers face the possibility of another hot, dry planting season, spurred on the possibility of another La Nina weather pattern.
Speaking at the Ag Market Network’s January conference call, John Robinson, Extension economist at Texas A&M University, says overall U.S. cotton acreage is likely to decline in 2012, with the Delta and Southeast growers tempted by the economics of corn, and to some extent, peanuts.
But dry weather and Mother Nature “will likely trump any relative price argument in the Southwest and temper any overall reduction in U.S. acres.”
“We’re likely going to see the same pattern of planting we saw last year in Texas, when we planted 7 million acres into extremely dry conditions,” according to Robinson, noting that dry weather still persists in the region. “We had a very high insurance price, and it makes sense from risk management and agronomic standpoints to have cotton in that situation.”
Whatever is planted in Texas, “won’t necessarily translate into bales,” Robinson added. “So the market will be facing a lot of production and supply uncertainty, particularly during the first half of the year. We will be in a weather market situation.”
Price volatility from this uncertainty should buoy prices, noted Robinson, “but when the weather premium goes out of the market in August or September, “prices could begin to trade at the lower end of the projected price range.”
The cotton market is also watching China’s recent purchases of cotton for rebuilding its reserves. Market analysts have said this effectively takes those stocks out of play creating a synthetic tightness of supply.
But Robinson says the move could come back to bite prices. “It raises the question of when and how these stocks will be released. Will it be orderly? I can think of several instances in history when prices rose as China accumulated large stocks, then went to really low prices as a result of the way they unloaded them.
“Uncertainty about Chinese stocks being drawn down in 2010 led to the great price rally and volatility of 2010-11.China can have a big impact on the market. I don’t think it’s necessarily good. Synthetic tightness could just as easily become policy-induced oversupply.”
In bearish news for U.S. cotton exports, USDA reduced China’s cotton consumption by 1 million bales, which Robinson says are the aftereffects of the hangover of higher prices. “I don’t think we’ve necessarily seen the end of that.”
Market analyst Mike Stevens says the cut in U.S. cotton exports “was a surprise to virtually everybody. Yesterday’s sales report (Jan. 12) was the best in two months. That’s a mystery, but it has to be telling you something.”
Stevens noted that USDA raised China’s imports by 500,000 bales and reduced U.S. exports by 300,000 bales. “That’s the first time I’ve seen them move in opposite directions like that. I think this could be a statement that pricewise, we are uncompetitive in the world.”
While USDA’s January report “took a little bloom off the enthusiasm from a fundamental point of view, the market held like a rock,” Stevens said.
Carl Anderson, Extension professor emeritus, Texas A&M University, says given the uncertainty and volatility underlying the cotton market, “producers want to make sure that they are protected for a surprise in this market in either direction. The non-users of cotton and the non-cotton fundamentals are rolling along positively and could cause a buying spree that may not be foreseeable from the cotton fundamental side, which are more bearish than neutral or positive.
“If you see December 2012 cotton prices wanting to edge up above 95 cents and go for a dollar or higher on a short-run basis, that may be a very critical time to review your pricing options, and see if you can find some contracts that you feel comfortable with. But be extremely cautious in an atmosphere when the market is trading on the positive side, and it’s coming from the non-users of cotton.”
Capitalizing on opportunities
Pat McClatchy, executive director of the Ag Market Network, said the challenge for cotton producers today is not necessarily to figure out market forces, but to capitalize on opportunities they create.
“We’ve gone through an evolution in cotton. The cotton market has become a multi-dimensional, rather complicated puzzle for analysts who are trying to decide what is going on. Things we did not look at in the past, we have to look at today.”
McClatchy said these factors include the value of the dollar, overseas financial conditions, crude oil, grains and funds. These factors can have both macroeconomic as well as short-term impacts on the cotton market. “The funds can push a market further than any of us would have thought they could.”
Cotton producers have plenty of opportunities “to get higher prices than they would normally get,” McClatchy said. “We seem to swing to extremes. There are opportunities for super low prices in cotton, and actions to be taken.”
Stevens agreed. “How far will a market go? Too far. It always has and always will, and that’s where the marketing opportunities come into play. Most market moves begin technically, and when they’re about halfway through a move, the fundamentals will confirm or reject that move. Keep an eye on the fundamentals. When the market technically gives you an opportunity, that’s money in your pocket.”
Anderson sees March futures as stronger than December futures. “March has a good likelihood of staying in the 88 cent to 98 cent range, but could make it over a dollar for a short period of time.
“For December, I was very impressed with the strength that the mid-80s showed. I’m friendly to a December 2012 trading range of 85 cents to 95 cents. But given the extremes of the market, I would leave the door open for a December range of 75 cents to 95 cents, which indicates that December is not likely to try the dollar level, given what we know now about the fundamentals and non-fundamental forces. When cotton gets in the 95 cent area or higher, it’s time to get serious about fixing some of your crop prices.”