By Dr. O.A. Cleveland
Special for Bayer CropScience
So much for my 93/94 cent floor price…maybe I need to sleep at a Holiday Inn Express a few nights. The past two weeks have not been kind to cotton and most of the other commodities. Cotton has its own bearish problems, but all commodity prices have suffered from the world financial communityΆs concerns over the European and U.S. debt. Those concerns will continue to plague the markets for a number of months, if not for a couple of years. This implies that for the short term and intermediate term business activity will remain slow and that there will be only a very slow grinding upward advance in the demand for cotton and other commodities. The continuation of the lull in demand will pressure cotton prices and likely keep the New York ICE March 2012 contract hovering near the 90 cent level. Too, it will place added emphasis on production is 2012.
Yet, global cotton consumption should increase as much a two percent during the 2012-13 cotton marketing year as some international mills will find it necessary to rebuild yarn inventory. Further, the recent drop in price uncovered a fraction more of demand. Should the market drop as low a 86 cents then consumption will get another boost with cotton and polyester being somewhat evenly priced.
Despite very strong sales to the Chinese during the past three weeks, sales to other countries are somewhat limited for three reasons. U.S. cotton is not generally competitive with most foreign growths at present. The more competitive foreign growths are undercutting offers for U.S. cotton. That is, the U.S. is in danger of reverting to the supplier of last resort. Additionally, sales are limited as many international mills are operating hand to mouth and are generally covered through the first quarter of 2012.
Too, as demonstrated over the past two weeks the price came back to the mills.
Thus, for now mills are sitting back saying, “there is no reason to buy cotton, the price will come down even more.” Note that the March 2012 call sales report indicated that the ratio of call sales to call purchases was 30 to 1. Unless mills begin fixations while March futures are in the high 80Άs, there is a significant chance they will get caught having to bid futures prices higher in order to offset their futures position.
The 2012 new crop year is now hovering just above us and the December 2012 contract is some 19 cents below its 52 week high of 107.20 cents. With futures prices just below 90 cents, the December can look to move back into the 90Άs as the planting season approaches and the market bids for more plantings. Prices have slipped enough that competing crops will take cotton acreage in the U.S. unless December 2012 can climb back to the 100 cent level and that will most likely not happen before planting. Since cotton plantings will drop around the world in 2012 the market should experience a late winter/early spring rally back to the 95 cent level or more. Look for world plantings to be off as much as ten percent. In the U.S., the Southeast is expected to reduce its plantings ten percent. The MidSouth will cut acreage about seven percent. The West will reduce Upland acreage, but will increase Pima as much as 50,000 acres. Georgia will experience the largest cut (except for Texas) in acreage in favor of peanuts. Texas could see as much as a 2.5 million acre reduction depending on soil moisture. Another dry year and Texas will again plant “fence row to fence row.” However, adequate to excellent soil moisture would likely create a situation where Texas plantings are reduced as much 2.5 million acres. (That seems a bit odd, doesnΆt it? Yet, that is the effect of the crop insurance program.)
The trading range has widened, ballooning out to 21 cents for old crop. The market will likely see active movement between 86 cents and 107 cents. New crop looks to be in its low cycle for now. Yet, until planting intentions are better defined, look for December to remain between 86 cents and 93 cents, but favoring the high side.
