Shurley on Cotton: New Round of Weakness Sets In

Merchants are now pricing cotton basis the Mar15 futures contract. March futures (and all prices) have suffered a new round of weakness over the past 2 weeks.

Prices closed at 58.75 cents/lb on November 13–a new contract low. Prices fought back to just shy of 60 cents on 2 occasions–on November 18 and then again on the 20th. Prices were back down and closed at 58.81 today near the recent contract low.

Prices were thought to have “support” at the 61 to 62-cent area and evidence indicated so. But the support or “floor” did not hold and now, nearby March has plummeted to the 58-cent area. Commentary and analysis has indicated the reason for the decline to be “technical” or “speculative” considerations.

I will not attempt here to explain what all that means; besides, I prefer to seek reasoning in terms of good ol’ economic fundamentals. What I can say is that “support” can only come from buying–speculative interests going “long” and/or the purchase of physical cotton. Recent export sales have been good but such reports have not been sufficient to overturn negative global supply/demand factors and turn the negative tide in the market.

So, what does this all mean? Losing or breaking a level of “support” on the way down, this level now becomes a “ceiling” that prices must negotiate on the way back up. For prices to improve, prices must now hurdle over obstacles at 61 cents and 64 cents.

Not to say that it can’t be done; anything can happen. But upside potential becomes more difficult.

Dec15 cotton has also taken a hit–closing today at about 63 cents. Once at better than 70 cents in late August, Dec15 has lost about 11% since then. This will very likely discourage cotton acres for next season. This seems especially so when you consider the likelihood and factor in possible PLC or ARC payments on acres planted to covered commodities on Generic Base.

I am getting more and more questions about prices for the 2015 crop. Prices will improve when stocks and supply and demand get in closer balance. This requires a reduction in acreage and production due to low prices and/or improved demand also due to low prices.

Prices will not stay at these levels very long–because the supply side will retract and this, assuming demand remains solid or improves, should eventually pull prices back up. Will we see 80-cent cotton for 2015? Not likely. Will prices stay in the low 60’s? Not likely. If I were a cotton grower, I’d be looking at 70 cents. Is that profitable? No. But, it’s 10% better than where we are now and hopefully we’ll do a bit better.


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