Cotton is currently riding a bull so lively that market analysts find it hard to quantify potential prices.

Already at a 15-year high (cotton for December delivery is currently just over 94 cents), cotton prices appear poised to move much higher with news that the Chinese and Indian crops have been hit with rains and frost.

The Indian cotton shortage is so acute that the nation’s textile industry (which employs some 35 million people) has asked for cotton exports to be halted through December. As of Tuesday morning, the Indian government was reportedly studying the request.

Chinese weather has also been less than friendly to the country’s cotton crop.

“We’ve talked about it all year and there are some real problems, there,” said O.A. Cleveland, Mississippi State University Economics Professor Emeritus, during a Tuesday morning panel discussion sponsored by Ag Market Network. “The USDA dropped that crop 500,000 bales last week — and it will probably come down lower.”

In August, “Chinese textile exports set a monthly record. And Chinese textile exports have been higher for 10 consecutive months — setting three new monthly records.

“So, extremely strong demand is hanging around this market.” As of the Monday morning, “Chinese prices were at $1.30 and 28 points. And they’re still climbing.”

Asian weather

The weather problems in China and India — along with those in Pakistan, which has been hit with devastating floods — have the market “in a near panic,” said Mike Stevens, a trader in Louisiana. “There have been unwanted rains in both India and China and, now, possible frost in a northern (cotton-growing) Chinese province.

“The nervousness about the supply situation has kept upward pressure on Chinese internal prices — both cash and futures. In fact, Chinese prices were through the roof again (Monday night). … I think their spot market is somewhere around $1.30 to $1.35.”

Meanwhile, the Indian Spinners Association “is putting massive political pressure on the government to limit, or even stop, exports,” said Cleveland. “If that comes about it would explode (the cotton) market even further.”

Stevens said sources close to the Indian crop situation — “and this is where things really broke loose overnight — have expressed real nervousness about their supply situation owing to recent rains.

“India’s textile industry has urged their prime minister to ban cotton exports until January. They complain local mills face serious domestic scarcity and spiraling prices after ‘excessive exports.’”

The proposed ban is so volatile because many were relying on a record Indian crop to bridge the cotton supply gap.

“The argument given by the Indian textile industry … is that if the cotton is exported unabated, the industry will have to reduce capacity,” said Stevens. “That would cause large unemployment. They say only the cotton exportable surplus should leave (the country). … The argument coming from their textile people is pretty strong. The pipelines are empty.”

Fundamentals
For the most part, the United States “has an early cotton crop everywhere,” said Cleveland. “It should get into the pipeline quicker than it usually does. That could slow (the market) down but the other factors tend to support the market and push for (prices) more than $1.”

All in all, “we have very — and emphasize very — strong prices well into 2011. Textile margins have become very tight but spinners still report good business. Yarn mills are very active.”

For the U.S. consumer, the price of textile goods at the retail level continues to drop.

“I think we’ll see consumers remaining very active in purchasing textile and cotton-rich goods,” said Cleveland. “It’s very interesting to see the textile mill margins tightening at the same time retail prices are dropping. There’s a squeeze on the yarn mills.”

Stevens, too, finds the market intriguing. “Technically, we’re overbought. But we’re heading higher on a lack of resistance. If you look at the lack of volume each morning, we’re up 100 to 150 points on almost no volume, at all. Buyers have to bid prices up to find a seller.

“For now, we’re pretty much on a one-way street with no sign of a top. Until we can close below a previous day’s low, you can’t even make the buyers nervous. To even hint at a possible near-term top, the market needs to actually close below last week’s low. That’s now at 90 cents — and we’re 400 points above that.”

From a technical point of view, Stevens sees nothing “to keep the market from going well over $1. Of course, sooner or later, we’ll get a sell-off. However, there should be excellent support for any sell-off into the 88-cent to 86-cent area.

“The only way mills have been able to buy anything and live with it is they’ve been buying cotton on call and will fix the prices later. They know, sooner or later, we’ll get a sell-off.”

Resistant weeds

Before Mid-South growers move back into major cotton acreage, they’ll need to factor in the cost of dealing with a burgeoning population of glyphosate-resistant weeds.

With current wheat, corn and bean prices “it will take 90 cent cotton” to bump up Delta cotton acreage, said Kenneth Hood, a north Mississippi producer who was also on the call.

“This resistant-weed thing in cotton is very, very serious,” said Hood. “I farm 100 miles south of Memphis and the resistant-weed problem is continually growing into a wider and wider area. Two or three years ago, you didn’t see much of it. Today, (resistant weeds) are in almost every cotton field. The cost of production is going to affect us.”

An abstract bull
All in all, “we see an extremely bullish situation,” said Cleveland. “Funds continue to pour money into the market. I think they’ll continue to do so because of their concerns about the U.S. and world economies. … Even with a 6-cent drop (in price) the market would still be very strong, technically.”

From a fundamental viewpoint, “if the USDA is on target with its 2.7 million bale carryover, we could have an entire season where 75 to 80 cents looks cheap,” said Stevens. “The market has now become completely abstract. And with empty pipelines it’s extremely difficult to justify prices with the fundamentals.”

The situation, said Stevens, brings to mind a truism: the market can stay irrational longer than you can stay solvent.

“How far can the market go?” asked Stevens. “The answer is too far.”