Cotton market fundamentals look strong but opinions are mixed after prices slipped from last week's historic highs.
“With new-crop futures at $1.30, how can you not do something” to lock in prices, said farm marketing and management consultant John Miller early this week.
At Southwest Agribusiness Consulting in Caldwell, Texas, his budgets for farming clients indicate the cost of production is roughly 80 cents per pound. He figures new-crop basis at 5 cents to 10 cents. “If they make a crop, this could be one of the best times for producers,” says Miller.
On the International Cotton Exchange in New York, March futures on Feb. 18 soared to $2.1102, then dropped to $1.9702. March futures slipped further to settle at $1.8794 yesterday. New-crop December futures had spiked above $1.30 last week, but settled back to $1.1939 yesterday.
Even after futures backed off their highs, Netherlands-based bank ABN-Amro was quoted as saying $3 per pound could be a low call for cotton futures by the middle of this year. Acreage will increase, but stocks will stay tight, said the bank.
However, T & K Futures and Options, Port St. Lucie, Fla., said today that cotton futures prices are a bubble ready to burst. “I just don't think it's sustainable,” says T & K President Michael Smith. “The cotton farmers I've been talking to have been trying to hedge. They see it that way too.” Technical indicators and price action are key signals, he says. “These up-limit and down-limit days usually show me a top,” says Smith. “We're not going to know for a week or two.”
“The current price situation has support from the fundamentals,” reported the National Cotton Council early this month in its economic outlook for cotton in 2011. USDA's projections for ending stocks reached their lowest level in at least 50 years. The council projected exports to reach 15.6 million bales in the 2011 marketing year, up from 15.3 million in 2010, The council's planting intentions survey, conducted from mid-December to mid-January, indicated a 14% increase in plantings from last year to 12.51 million acres this year.
Prices rose more for cotton than for corn and soybeans since farmers responded to that survey, notes Gary Adams, vice president at the council. “If that continues as farmers make planting decisions, we may see more acres than the survey showed,” he says. And on the demand side of the equation, “We have to watch what happens to energy prices and consumer spending,” says Adams.
Producers in the major cotton-producing areas of Texas likely will increase their cotton acreage this year by 10 percent to 20 percent, says consultant Miller. In the central and coastal areas of Texas, where planting is just a few weeks away, plantings likely will increase by 20%, he says. But in West Texas, where cotton acreage already is strong, extremely dry conditions may limit plantings.
Contracts and options
Growers have been contracting some of their new crop, says Miller. Some major shippers are offering acreage contracts, but as cotton prices have risen those acreage contracts have become less available. In some areas of Texas, only bale contracts are available. Some producers, especially those who irrigate, may be willing to contract bales. But West Texas is prone to hailstorms, so producers there are reluctant to lock into bale contracts.
“Producers in some cases, where available, are contracting but are being careful because we have 10 months to market this crop,” says Miller. “Without knowing more about their production, they are forward contracting cautiously. Shippers are contracting cautiously too.”
Growers trying to take advantage of high prices have considered futures, but many of them don't want the risks associated with short positions. “That puts them into options,” says Miller, “but the increased volatility has made options close to the money fairly expensive.”
Miller says he is advising clients to use puts in a way that makes sense, paying what they can justify on their own operations.