“This tells me that 84 cents is a pretty hard ceiling as we begin to look at pricing the crop that’s growing now. With the July contract going off the board at 84 cents and moving to the October contract, we’ll probably see a bit of a dip. But there remains a significant technical uptrend in the market.”
This year’s cotton crop “is the best it has ever been at this time of year — never before has it been this good at this point in the season; it’s phenomenal,” says O. A. Cleveland, Mississippi State University economics professor emeritus.
Now a private cotton analyst who consults for several organizations, he said at the joint annual meeting of the Mississippi Boll Weevil Management Corporation and the Mississippi Farm Bureau Federation’s Cotton Policy Committee, that the average condition of the crop across the U.S., at mid-July, was 103.5 percent of normal.
That’s based on the last USDA Cotton Crop Condition Report, with data he’d added to update the analysis.
“Texas is leading the way, with 106 percent of average,” he said. “With 5.7 million acres of irrigated cotton and vast acreages of dryland cotton, they are looking at a potential harvest of 10 million bales this year. I know a lot of things can happen before that cotton is harvested, but to have a best ever crop at this time of year is really something.” And looking at USDA’s Drought Monitor report, Cleveland said, “The situation in Texas looks just wonderful in terms of moisture. The only problems in the Mid-South are a fairly extreme drought along the Red River in Louisiana, an abnormally dry situation in the Mississippi Delta, and pockets of drought in North Carolina and south Alabama.
“Unless there is a major change, I would expect the next crop condition report figures will be even higher.
“All of this speaks very loudly that we have to anticipate a large crop this year. It also tells us that this anticipation of a large crop will put pressure on the New York December futures price throughout the year.”
Even so, Cleveland said, fundamentals point to “a good year ahead for cotton.”
In March, he noted, cotton futures hit 84 cents for the July contract. “There was tremendous pressure for call sales by mills that had already committed to purchases of cotton, and in many cases had already taken the cotton, spun it, and sold it — but they hadn’t fixed the price on New York futures.
“So, we were sitting there with ratios of something like 25-to-1 of cotton that had been sold this way versus cotton that merchants had bought from growers. The textile mills had to go to the futures market and buy cotton. There was a tremendous volume — more than I’ve ever seen in my career — of futures that had to be bought to satisfy old sales of cotton that had been made by textile mills.
“They were under tremendous pressure to fix their cotton properly, and we were already at 84 cents on the futures market, which had everyone looking at the numbers and wondering how it could keep from going to the 90-cents to 95-cents range.
“But, the market was good to them in that regard, in that it never got much above the 84-cents level. Still, they could have done it all at much lower prices — they got stuck pretty hard.
“This tells me that 84 cents is a pretty hard ceiling as we begin to look at pricing the crop that’s growing now.”
Looking at charts of New York futures from a technical perspective, Cleveland said, “With the July contract going off the board at 84 cents and moving to the October contract, we’ll probably see a bit of a dip. But there remains a significant technical uptrend in the market.
“Additionally, we see that while the ICE futures have come down as we move from July to the October and December contracts, we don’t see a similar decrease in the A Index. The A Index has come down, but not to the extent as New York. We would anticipate that the A Index is going to set the pace now because it looks more at the world situation.
“Going into next year, I think we have to be very careful as we move into July 2011, at the tail end of the market year. We very easily could be in an inverted market situation similar situation to what we saw this year, with the Dec. 2011contract going above the July 2011 contract by as much as 12 cents to 13 cents.
“I’m not saying Dec. 2011 is going to be 12 cents to 13 cents higher than today, but what I’m saying is that the spread between July 2011 and December 2011 could widen out to 12 cents to 13 cents, simply because of the expected tightness in world supplies and the location of those supplies.”
Bottom line, Cleveland said: “Cotton will likely remain in a bullish market, though it may be in a narrow trading range around 75 cents until we get nearer the Northern Hemisphere harvest period before it’s going to be able to break above that.
“If it fails to hold in that 73-75 cents range, we could drop down to the 68-cent level. But I wouldn’t panic for one second; I might want to buy some calls at 68 cents. With a potential big crop out there, I just find it tough to see December going above 80 cents, but I do see July 2011 having the ability to go beyond 84 cents.
“If you haven’t priced anything on any of the moves above 75 cents, I’d suggest starting to price a little December. At 79 cents, I’d be three-quarters sold.”
Cleveland said, “I think things will be a bit flat and stable, with not a great deal of volatility for the next two or three months. But, once we get a better handle on the crop size and move into the Northern Hemisphere harvest, I think the market will get much more volatile and we could see moves of 3 cents up and down in one day.”
