There's been a lot of information swirling around the cotton market recently, but a market analyst suggests “staying focused on the supply and demand picture most recently painted by USDA.”
John Robinson, Texas A&M ag economist, speaking at the Ag Market Network's May teleconference, said USDA's forecast for the 2005-06 cotton marketing year “is somewhat positive for cotton prices and outlook. Our focus for the next month should be on how everything unfolds, beginning with crop conditions and planting progress, then moving to the June acreage report, when we will learn how much is planted.”
Cotton yields for 2005-06 could come in lower that USDA projected because it used a three-year average yield to project an average yield of 745 pounds per acre. The narrower timeframe places more value on the impact of new technology, new varieties and boll weevil eradication on yield.
But Robinson believes a more conservative approach is needed and adds a few more years of history to his trend line. “I think there is room for more variation than what we've seen in the last three years. I believe the variation could be to the downside. If U.S. yield is less than 745 pounds, this would tilt the supply and demand picture, reduce stocks and support prices even more.”
Another thing to watch is the ongoing export picture, “which became somewhat muddled with the early May revision of USDA's weekly export sales reports.”
U.S. exports for the week ending April 28 were reported at nearly 1 million bales. But there were significant reporting errors and the report had to be corrected the following week, which resulted in a negative number for net export sales for that week.
Nonetheless, “we have a good USDA forecast of U.S. exports for 2005-06 at 14.5 million bales.”
Now, if only it will hold true. “The point to be made is that there is still a lot of uncertainty over production in India and China and how much they will need to import, and how many of those imports we're going to get.”
As for marketing strategies, “we need to be positioning ourselves today with marketing strategies that protect us from lower prices, but allow for the possibility of higher prices at least into the 60s.
Robinson believes new crop prices could trade into the lower 60s. “However, if there is any kind of a production shortfall, we could see prices higher than the lower 60s. On the flip side, we haven't left the realm of the possibility for lower prices, especially with the uncertainty of foreign production.”
One recommendation “is to finance the cost of put option strategies by either selling puts 10 cents below where you are trying to put in your floor, or selling out-of-the-money call options.”
For example, “If futures are trading in the 56-cent neighborhood and you want to buy a put somewhere around there, premiums have been about 300 to 350 points. You can offset some of that cost by selling puts below that in the 44-cent range, which I think would be fairly safe, or selling calls up above that.”
Robinson has more detailed examples of these strategies along with possible outcomes on his Web site at http://agecoext.tamu.edu Click on the cotton link to go to Robinson's site.
Robinson is uncertain whether a recent ruling by the Bush administration to restrict imports of certain types of cotton apparel from China will have an impact on the cotton market.
“The action is allowed under the WTO agreement that China signed when it joined the WTO. They agreed that if their imports are coming in at improperly high levels, the United States had the right to place restrictions on imports. Reports I've read indicate they didn't like it, and why would they? And the fear is they might retaliate by buying cotton from somewhere other than the United States.
“My hope is that they will simply acknowledge that it is part of the agreement that they signed and it's ultimately to their advantage to be a part of the WTO and they will just move on.”