Short-term bearish, long-term bullish

Cotton prices have taken a beating recently, with several bearish factors weighing on the market. But if the world consumes more cotton than it produces in 2005-06 as USDA projects, it could be the driving influence for a longer-term bullish situation.

According to Texas A&M agricultural economist John Robinson, short-run bullish factors start with an excellent USDA weekly export sales report on June 16 — 239,500 bales, including 135,700 bales to China. “People had been worried about the impact of China and U.S. government impasse over textiles. It's created a lot of uncertainty and people have been worried about how that is going to impact Chinese buying of our cotton in the near term.”

This uncertainty “has been keeping a lid on cotton prices. The speculatives who were long have been getting out of those positions and going short. That's what caused the most recent decline.”

Robinson assumes that the United States will work out its differences with the Chinese. “The Europeans came to an agreement with them, and that seemed to cause a little bit of optimism. If we can, we move into a longer-term positive picture for 2005 for December and beyond.”

Good news includes the most recent U.S. stocks-to-use estimates from USDA. “Going from 2004-05 to 2005-06, the percentage has gone from the high 30s to the high 20s. That's a big drop in stocks-to-use, which is usually positive for prices.”

The decline assumes that the United States will export USDA's June forecast of 15 million bales of cotton in 2005-06. But some conservative analysts point out that the forecast is based on the assumption that world planted acres are declining significantly. “I don't think the rest of the world cut their acres that much,” he said. “There's no direct evidence to back this up, but world prices haven't been so low in January and February (to discourage plantings).”

So if production comes in higher than expected, “the picture would be a little less rosy. But in the long term, if everything plays out like USDA is forecasting, I can see December climbing into the high 50s.

“If growers haven't already put in a floor when futures were in the high 50s, I would be waiting for futures to go back up before taking any kind of a position,” he said. “It may not happen until late in the fall. It may not until December is getting ready to expire.”

Robinson has some examples of various hedging strategies on his Web site, Click on the cotton link to go to Robinson's site.

e-mail: [email protected]

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