Expect cotton prices to start trending lower between now and harvest, but watch for December 2008 futures to lead prices higher next spring as producers prepare to plant their 2008 crops.
This was the general opinion of a panel of cotton market analysts speaking at the Cotton Roundtable in New York City in July. With this year's cotton crop halfway home, here are their thoughts on prices over the next eight months.
Jarral Neeper, vice president, marketing, Calcot, Bakersfield, Calif. — “I thought we would have higher prices this season, but they have happened faster than I thought they would.
“I'm not terribly bullish for the 2007 crop year. The low side could be 60 cents to 61 cents from here until December 2007 goes off the board. Maybe we'll see a high of 72 cents to 73 cents on the nearby contract as we work our way through the season. But we have lot of carryover to work through the system.
“The ultimate direction of December 2008 is going to depend on what we produce in 2007, how much we take off the market and how much we take forward into the new crop year.
“Growers in the San Joaquin Valley would like to see a minimum of $1,200 per acre in total revenue. In today's pricing environment, particularly with input costs, $1,300 to $1,400 is more realistic. At a 1,500-pound per acre yield, we need 80 cents to 85 cents to the grower.”
O.A. Cleveland, professor emeritus, Mississippi State University — “December 2008 has to buy some acreage. In the Southeast, we need to put about 75 cents on the board to get them to back out of wheat and soybeans. Wheat seed bookings are at an all-time high in the Southeast. It may take a little less than that in the Mid-South because the rotation with so much corn is going to give growers more humus in the topsoil and they'll be more agreeable to plant cotton.”
Joe Nicosia, president and CEO, Allenberg Cotton Co. — “No matter what you're trading today, you're trading corn. Today's phenomenon of high agricultural prices is being driven by corn. If you really want to see longer term where cotton is going, you have to get corn right. This whole agricultural revolution is being driven by the ethanol regime.
“The December 2008 is going to have to retain acres. It's not a given that the United States has to get back 2 million acres (of the 4.2 million it lost this year compared to last). There is the possibility that production in India and China is so large that imports fall off and carryout is so large that we can continue to have our cotton land be borrowed by beans and corn. But I do believe that somewhere we are going to see weakness in the front end of the market.
“We continue to hear complaints about how prices in the United States are holding down growers around the world. At 72 cents, prices are substantially higher than where they've been over the last five years. So whether or not we see an acreage response in the world will be interesting.
“Short-term, prices are down 1 to up 2 over the next few weeks, but after that, I think we see a slow erosion in the front end, probably down to the low 60s and if the crop is really big, maybe down to the high-50s.”
Carl Anderson, professor, Texas A&M Extension specialist emeritus — “Given the market we've seen, we have a lot of resistance moving December beyond 69 cents. It's possible to get more than 70 cents by the old adage that you overbuy markets and you oversell markets, so we may run up another 4-5 cents just to overbuy, but be careful.
“In years past, we often think of a short crop year as one where prices are the highest at the beginning of the crop year, rather than later on. If you want to call this big drop in U.S. acres a short crop, I would think by the middle of September, as we get into better estimates of actual production in the United States and the world, we might see this market weaken.
“If we have two years where we can keep carryover down around 4 million bales to 5 million bales, then, as a residual supplier, I can see the A-Index, in late 2008 to early 2009, in the 80-cent range or better. That will consequently set off higher acreage around the world and we're back in the old cycle of having a plentiful supply worldwide.
“A few cents for buying options is good price risk management up or down. There would have been a big payoff for anyone who would have purchased December calls in the 56-cent to 58-cent range. Now they would have a handsome profit to offset the reduction in their counter-cyclical payment. Now all they need to do is fix their price as best they can at the higher levels.”
Mike Stevens, Swiss Financial Services — “I think we're going to start trending lower between now and the August crop report. The December contract has the biggest open interest (as of July 13) of any cotton contract in history and that makes up 75 percent of the market. So it could be fast. It could be furious. We could have some sharp downturns, not necessarily a slow erosion.
“If we start to develop any major problems in a major exporting country, Pakistan, India or China, we can have another run. But outside the market, we have to keep people bullish commodities in general. The expeditious use of options is the only way to participate in this market.”