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Cleveland On Cotton: Is it Just Me or the Market?

AaronT
By O.A. Cleveland, Professor Emeritus, Mississippi State University May 11, 2012 15:18

Cleveland On Cotton: Is it Just Me or the Market?

Let’s see, let me sugar coat this in my favor.  After being dead-on for two consecutive years of higher prices, I have really missed it this year. I have been wrong, wrong, wrong. I must be stupid, stupid, stupid or dumb, dumb, dumb. …Possibly both. That said, the intercrop demand for land should support the December cotton futures contract at the 74 cents, but not much I have said this year has proven to be correct.

USDA’s May supply demand report drilled the final nail in the coffin as one of today’s AgMarket Network speakers proclaimed the market discussion was nothing more than a funeral. Leading up to Thursday’s release of the USDA report the New York ICE December 2012 contract had been down for nine consecutive trading sessions. Yesterday’s 400 point limit down day marked the tenth consecutive day of lower lows.

The report predicted a significantly sharp rise in both U.S. and global ending stocks. World ending stocks were raised to a record 74 million bales for 2012-13, the next marketing year. Ending stocks for the current season, ending July 31, were estimated at 67 million. Ending stocks for the current season, are a new record. Now we see that the forecast for next year will be seven million more, the aforementioned 74 million bales, yet another new record.

        
         

These are both short term and long term bearish. I, and others, had ventured to suggest that China’s continued buying in the coming four months could be bullish for the market. Not so, all potential bulls in this market can be viewed as steers, me included. Near term Chinese buying may halt the slide in prices, but don’t look for anything above 80 cents in December unless Mother Nature looks unfavorably on the crop.  The new bull in the cotton market, absent Mother Nature, is bullish for four or five cents. World stocks of this magnitude suggest that cotton prices will spend at least the next three years below that once glorified one dollar…no firm prediction beyond that. Yet, with the bulk of the world stocks owned by the Chinese National Reserve, that government will have the major political say in price direction, both short and long term. (Yes, that suggests governments can control a market, for a period of time, but is not say they will or that they can even dominate.)  USDA has publically stated that they believe China will gradually release those stocks through the year, implying that prices will likely remain between 70 and 82 cents for the remainder of the year.

World production was forecast at 117 million bales while world consumption was placed at only 110 million bales (thus, accounting for the seven million bale increase in world carryover to 74 million bales). Yet, this represents a three percent increase above the 2011-12 estimate. The U.S. projected stocks-to-use ratio of 32 percent was forecast and is well above the last three seasons, but only slightly above the 10-year average of 30 percent. The forecast range for the marketing-year average price received by producers in 2012-13 is 65 to 85 cents per pound, compared with 91.0 cents estimated for 2011/12. USDA projected that China will own some 28 million bales at the end of the season, some 38 percent of the world total. This would represent an 86-90 percent Chinese stocks-to-use ratio, a truly unprecedented situation.

AaronT
By O.A. Cleveland, Professor Emeritus, Mississippi State University May 11, 2012 15:18

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