Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University
Special for Bayer CropScience
Cotton prices took it on the chin this week as did most other commodities and the major equity markets as well. Gold and other metals, as well as the oil complex, and the grain/ oilseed complex provided company for the downward slide prices. However, after six down days the cotton market was able to push higher on Friday, pushing near 102 cents and bringing the New York December 2012 contract back to near 95 cents. The sell off did uncover good mill buying for both immediate and first quarter purchases. The market appears to have solid support at this weekΆs lows near 94 cents. December 2012 has similar support just above 90 cents and should have life back above the one dollar mark once the December 2011 has gone into expiry.
The price dip near the 94 cent support line marked the fourth time since July the market has found support at that level. Thus, with a quadruple bottom at 94 cents, one should expect 94 cents to be the ultimate bottom, a very-very firm bottom, but who knows. Nevertheless, I will suggest to you that it is the bottom of the market, despite major world economic difficulties and WashingtonΆs decision, both sides of the aisle, to abdicate their leadership responsibilities in favor of their own person self interests. In reality the FED has done all it can do to help jumpstart the economy. Like the FED or not, they have about shot their wad. Any immediate or near term relief must come from the legislative side of government—both sides. Traders have scrambled to liquidate both commodity and stock holdings in favor of cash. This further added fuel to the fire as the dollar rose in value, making commodities cheaper around the globe, including cotton. However, employing a pet peeve of mine, the fall in cotton prices was statistically less than that of the equity markets, gold, oil, the grains/oilseeds and most other commodities. That was very true this week, but I also typically use the phrase, “statistics lie and liars use statistics.”
In the meantime demand will remain sluggish as the consumer—the big engine that is pulling the economic train and ultimately the price of cotton is, at best, creeping down the tracks as if in slow motion. Domestic consumption will continue to be flat to a possible slight decline and world cotton demand will grow. Yes, it will grow, but at a slower rate than the world population increase. Thus, pent up demand will be created. Such a posture portends an increase in world carryover stocks which in turn will sit on cotton prices as if it were a lead hat. Nevertheless, I still like the idea that 94 cents offers a firm bottom to the market.
Too, as mentioned last week, the minimum bid price established by the Chinese government for buying stocks to add to their national reserve program is also acting to support the nearby New York ICE contract near the 95 cent level. Thus, as would be expected, China has been a very active buyer of cotton this week.
The general economic news is most depressing to the consumer, me included. However, we have cautioned that a recovery would not be soon in coming as most truly did not grasp the depth of the economic and financial problems that surfaced in 2007-08. Nevertheless, commodities are a great investment in these times and have proven to hold value very well. Thus, cotton should continue to hold its value and flirt with the 100 to 125 cent range. The market will go back up.
