Lack of consumer confidence weighs on cotton

The world financial crisis has done more than send everyone’s 401-K plans into a near-death experience. It’s delivered a severe blow to consumer confidence.

According to Carl Anderson, Texas A&M University professor Extension specialist emeritus, speaking at the Ag Market Network’s October 14 teleconference, the trickle-down effect from this is weaker cotton demand, which is cotton’s No. 1 problem right now.

“People are getting very cautious about how they spend their money. As a result of weaker demand, cotton has made a 30-cent drop since late June. It broke through resistance at 58 cents like a sledgehammer through a thin sheet of ice. Fifty-cent cotton is what we’re looking at now.”

Meanwhile December 2009 cotton “is around 62 cents which is far from enough to encourage more cotton acreage for next year,” Anderson said.

Worldwide, it doesn’t appear there’ll be much of a price incentive to push for acres either. “In October, USDA reported increased world production of cotton by 1.5 million bales, lowered consumption by 1.5 million bales and increased world carryover by a bearish 3 million bales.”

This produced a stocks-to-use ratio of 45 percent, “well above the benchmark of 42 percent, at which prices tend to be more supportive.

“We’re hoping these low prices will boost our exports and if the economic crisis lessens a little bit, we might get to move some cotton. But everybody in the cotton industry, from the textile mills down, is very cautious.”

In October, USDA pegged the U.S. cotton crop for 2008 at 13.7 million bales, just a little less than the estimate for the previous month. “I think that’s a good number,” said Anderson. “Our Texas crop is still holding around 5.3 million bales. We’ve had some really great weather the last few weeks to mature the crop and we think we’ll make a good overall crop.”

USDA also lowered expected U.S. exports by 1.5 million bales to 13 million bales, pushing U.S. stocks from 4.9 million to 6.9 million bales. “Anything over 5 million bales represents plentiful stocks,” Anderson said.

“USDA lowered the average price received by cotton producers to a range of 51 cents to 62 cents, a drop from the September report. So we’re looking at a sizable counter-cyclical payment for the coming year.”

Anderson says the primary marketing alternative for producers “is to place the cotton in the loan and hope for higher prices. I might add that 70-cent December 2008 put options purchased during the first half of the year for 2 cents to 3 cents are worth about $75 per bale today.”

“Markets have come down in three distinct stages since early September, with each stage covering roughly 9 cents,” said Mike Stevens, Swiss Financial Services, covering the technical aspects of the market. “It seemed so long ago when December 2008 futures were trading around 69 cents to 70 cents. On Sept. 4, we were trading December at 69.90 and broke all the way to 49 cents in 27 sessions. The last break, from 59 cents to 49 cents, coincided with the worst of the stock market fall.”

The good news is that a bottom may have been achieved. “We need to recapture fairly quickly all of last week’s losses (Oct. 6-10). I believe there is a very good chance that the current lows are going to hold. If they don’t, it will be because of another serious stock market crash.”

Stevens says the loss of open interest in the commodity markets has been dramatic. “Obviously, open interest was too burdensome when we look back to March 2 when the market was going crazy. Since then, we’ve lost 124,000 contracts. We’re losing it out of the commercials as well as the speculators.”

Stevens added that mills worldwide are having difficult times getting credit because of panic perceived in the financial markets. “There is a lot of fear out there.”

Stevens says, “It’s only a matter of time before sellers start to pressure the market again, unless sales pick up. We need to find the price level for cotton, and that’s somewhere between 55 cents and 60 cents. Unless the demand picks up and the world economy picks up appreciably, it’s difficult to justify getting back above 60 cents.”

Texas A&M Extension economist John Robinson said that prices “have been pulled down further that where they should be fundamentally, but with fundamentals where they are, I don’t see us getting above 60 cents for December 2008.”

“What a difference a month makes,” said Pat McClatchy, executive director of the Ag Market Network. “In September, we were talking about how cheap everything had gotten, then we had the financial meltdown, and since then we’ve seen a 12.5-cent drop in cotton, a $1.20 drop in corn, a $2.22 drop in wheat and a $2.14 drop in soybeans.”

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