By Dr. O. A. Cleveland
Special for Bayer CropScience
The continued deterioration of weather conditions in the U.S. and parts of China, coupled with speculative funds returning to the cotton market, pushed both old- and new-crop prices higher. The nearby July ICE contract was up over 1300 points while the new crop December advanced over 1100 points. The significant decline in certificated stocks, coupled with increased ratio of call sales to call purchases in the July futures contract, added to the cotton price boiler. December is still trying to get to 145.00, but must first deal with resistance near 140.26 and again at 142.41. The price outlook for both the short and intermediate terms remains bullish, but the market will experience wide swings.
The extreme drought facing Texas and Oklahoma cotton growers continues to spread with virtually all areas facing 100-year drought conditions. Too, the 10-day weather forecast does not include any rainfall for the area. Crop insurance deadlines have already passed for the Rio Grand Valley, Coastal Bend and North Plains. The deadline for Central Texas is June 6. The South Plains deadline is June 10. Thus, by the end of next week, insurance adjustors will be working (or will have completed working) in ever cotton production area of Texas. Further, drought conditions have intensified in both the Midsouth and Southeast, http://drought.unl.edu/dm/monitor.html.
Virtually all of the Louisiana acreage is facing a severe to extreme drought, while Mississippi cotton ground is generally under a moderate drought. Some two-thirds of the Alabama acreage is under a severe to extreme drought.
Of the Southeast’s two big cotton states, Georgia is facing an extreme drought while North Carolina is facing moderate drought conditions.
Granted, there is time, but the season is off to an exceptionally poor beginning in the Mid-South and Southeast. For much of The Texas plains however, it is already too late.
The crop in the Chinese province of Xinjiang, the massive commercial agricultural kingpin of China, is very much on schedule. The current problem facing Chinese production is the drought region along the Yangtze River. That crop has been affected by drought, but can see conditions improve with rain in the next two weeks.
Economists like to talk about supply and demand, whether we understand it or not. Demand for raw cotton is lingering a bit as witnessed by the weekly U.S. export sales report was, for the ninth consecutive week, a negative. Thus, export cancellations, merchant buy backs, and sales switched to next year continue as a drag on demand. Yet, Chinese mills have begun to inquire for more immediate shipments of cotton. More importantly, certificated stocks have fallen to near 50,000 bales and ratio of mills call sales to call purchases for the nearby July contract is now some 15-to-1, similar to the situation when the May contract raced past 200.00 cents. I am not suggesting that July will climb to two dollars. It will not! However, this is a very bullish indicator, which will carry new crop and old crop prices higher in the intermediate term. The demand for certificated stocks is increasing. It is this demand, not the demand for raw cotton that is the primary demand factor in the current market.
Nevertheless, the only chance to break December above 145.00 and push higher is the continued drought in West Texas. The long-range forecast shows only a little relief in July and August for the U.S. Cotton Belt, see Seasonal U.S. Drought Outlook (updated last week of each month) That forecast does not bode well for the 2011 U.S. cotton crop and is now at the base of higher prices.
