The past year has taught cotton analysts one thing — the weather is easier to predict than the cotton markets.
“We did not see this train wreck coming,” said Carl Anderson, professor Extension specialist emeritus, Texas A&M University, speaking at the Ag Market Network’s November teleconference. “We missed the outlook by a mile last month. We couldn’t believe what’s happened in the last 30 days.
What happened was a 40-cent crop in futures prices from mid-year and a 30-cent drop in the last 30 days. “The sad news is that there is very little interest in buying cotton at 40 cents. Where is the bottom? I don’t know.”
The problem is that outside forces are wreaking havoc on the market, Anderson says. “We are in a deep recession in the world, and that includes Europe and China. On top of the economic turmoil, we have a serious financial crisis going on.
“We don’t know how much government support from the United States and other countries is going to cushion this recession, because we’re in free fall over much of the developed and developing world.”
To Anderson, cotton prices appear to be headed toward a low of seven years ago, “when December 2001 futures found the bottom at 28.5 cents in October 2001. That looks like one of the support lines we are headed toward. I hope we don’t get there, but we certainly are only 10 cents away.”
The global outlook for cotton is similar to that for the United States. Anderson pointed to USDA Nov. 10 world agricultural supply and demand estimates which forecast a little less world production and a lot less consumption than a month ago. The result is an estimated 2-million bale increase in ending stocks, putting the stocks- to-use ratio at 48 percent.
“I believe the stocks-to-use ratio will eventually go over 50 percent, which will put the A-Index below 50 cents,” Anderson said. “The only thing we have out there is a Chinese economic stimulus package, which will prop up demand somewhat. But we don’t know how much that will impact the cotton market.
“Fundamentally, the cotton price is about where it usually trades with this much surplus of cotton,” Anderson said. “The surplus came upon us suddenly because of the shrinking consumption worldwide and here in the United States. It’s going to be very slow buying until we find out if the propping up of the economy will spillover and help us put in a bottom on this market.”
Anderson says if the U.S. carryover next August “is at least 7 million bales, at that point, a 13-million bale crop is all that is needed. A crop of that size could be produced on 8 million acres, given today’s yields and normal abandonment. That would be 15 percent fewer acres than this year.”
Even cotton producers in Texas are considering alternatives to cotton in 2009. “Farmers I’m talking to feel like they cannot take the financial risk associated with growing a lot of cotton. So in Texas, they’re looking at wheat and grain sorghum, and in the Delta, they’re looking at corn and soybeans.
“That puts us in a downsizing mode and it certainly is going to damage the infrastructure of the cotton industry. Unfortunately, I think some of that damage is going to be irreversible.
“As for marketing this year’s crop, the loan is probably a natural. There will be a time when buying calls out of the money may be very good for the coming year as we expect this market to overcompensate on the downside. We certainly think it has a chance to level out at 40 cents to 50 cents.
“The problem today is that the volatility makes options very expensive, but it’s a safe way to go, and I doubt you want to put money into straight futures market under these conditions.”
“All commodity prices have been coming down since August, but none have been in free fall like cotton,” added John Robinson, Texas A&M Extension economist. “That’s probably because there is more of a firm demand propping up corn, and that has helped soybeans. Also they are more stable food-type crops.”
The behavior of the market this year points to another factor, according to Robinson. This recent tumble is another example that the cotton market has not been following its own fundamentals.
“We can go back to 2007 when there were rallies in the cotton market that no one would have predicted on the basis of our large ending stocks. They were spec rallies.
“Then we had the anomaly of 2008 in March when cotton was following grains and oilseeds higher. Then it seemed like all the commodities were following the oil market in the late spring of 2008.
“Then everything came down with the funds pulling all that money out. It didn’t matter what the monthly cotton supply and demand numbers were that month, everything was coming down.”
Robinson says the drop in cotton future from 70 cents to 50 cents “was the influence of the speculative money being pulled out. What we have now is uncertainty in consumer purchases. We have had really lousy retail apparel sales through September and October.”
The fact that low prices and mediocre export sales are existing at the same time “is evidence that we haven’t reached the point of value yet. I don’t know where the fundamental level of cotton prices ought to be. I’m guessing we’ve overshot it, but we are in a world of uncertainty, which makes price prediction difficult. Nobody really saw this coming.”
According to Mike Stevens with Swiss Financial Services, the persistent weakness in the Chinese market “is a real bugaboo. Many are cutting back on hours and they’re not using as much cotton. Their stimulus package is targeted toward infrastructure, low income housing, transportation and credit. That’s going to help.”
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