By Dr. O. A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
The chink in cotton’s price armor mentioned last week turned into a few gaping holes during the week. However, by week’s end the market had repaired the holes and prices regained a good portion of their losses. The drop in the May contract from the high to the low was 35 cents. Nevertheless, the end of the week trading brought all contract months back. Yet, the price decline was such that two dollar cotton was not posted this week. As a blessing for the bulls, the important technical points held in both old crop and new crop contracts. Prices are likely to trade plus or minus 15-20 cents as the market looks to the March 31 release of the annual USDA Plantings Intentions Report. The December contract found solid support at the critical 116.00 level and moved strongly higher without a struggle. Too, prices have moved back to just some 15-17 cents off the all time highs. Thus, the bull continues to strut.
The heretofore unknown level of price volatility remains and will continue as long as supply is so overwhelmed by demand. A clear point of this was made in the weekly export sales report. Net sales of Upland for the week ending 3/10/2011 were actually a negative 55,400 RB as cancellations of existing sales overwhelmed new sales. Yet, this was not the typical cancellation by mills “laying down” on contracts, but rather merchants requesting mills to let them out of existing sales contracts. Mill cancellations were widespread across many countries, an indication that merchants were attempting to get out of delivering cotton. The cancellations were generally small. Additionally, there was more than the typical number of existing sales that underwent destination changes. Again, it was because merchants are having difficulty finding cotton for immediate delivery (at an affordable price). Many mills were happy to “get out” of contracts that were for very high prices and merchants who had booked sales at those very high prices were willing to let the mills out. The question is why give up a “high priced” sale? The merchant had sold futures as a hedge when the mill sales contract was made. Prices came down, thus the merchant could buy the futures back--get out of the futures contract--and still make money. What began as a hedge turned out to be very lucrative speculative profit because the market moved well below the higher mill sales price--a very unusable situation. Demand remains strong in that new crop sales of Upland were a net of 231,600 RB.
Mills were also active during the week fixing the price of past sales. The call sales report indicated that over 5000 contacts were fixed on the May and July. Nevertheless, some 52,000 call sales (buying of futures) contracts remain for May and July 2011, Most, 32,765 contracts, are based on the July futures month. Therefore, market bulls remain in charge as mill price fixing (buying) remains abnormally large.
Yet, as the rise in cotton prices is timed to the same factors that led to the rise in grain and oilseed prices back in 2007-08, we must continually look to those markets for hints as to the future of cotton prices. The March supply demand report indicated the beginning of rising carryover stocks in those commodities. If those stocks continue to increase then prices for those commodities will decline and more and more acreage will creep back to cotton and creating a similar drop in cotton prices. Yet, that is another year or two away. Nonetheless, cotton prices are near all time highs and growers should become active in pricing new crop even though December is just below 125.00 cents.
Remember, if you like the price enough to plant, then like the price enough to forward price.
