Cotton Futures Drop, Continuing Downtrend

May 23, 2012 08:10 AM
Cotton Futures Drop, Continuing Downtrend


After cotton futures dropped their daily limit May 22, one broker predicted futures prices will stay on a downward trend toward a long-term low in a few months.
"I think that by the end of the year we will see it somewhere close to 60 cents," said Michael Smith, president of T&K Futures and Options Inc., Port Saint Lucie, Fla.
Most ICE contracts for July forward plunged the 3-cent limit, into the low to mid 70-cent range.
Analysts cited pressure from speculator liquidation of long positions in the face of heavy global supplies.
Asian warehouses have stocked up and are holding cotton they bought at higher prices, but they may have to sell some of those inventories, said Smith.
When cotton futures were trading at more than $2/lb. 15 months ago, he issued a warning that cotton futures were a bubble about to burst.

"As violent as these sell-offs have been, I think we are going to find the bottom quickly," Smith said this week.

Stocks Up, Prices Down

"The U.S. cotton projections for 2012-13 include higher supply, demand, and ending stocks compared with 2011-12," says USDA's May World Agricultural Supply and Demand Estimates report.
In the global cotton market, USDA projects a second straight year of record-high world ending stocks. Production likely will outpace consumption and world trade is expected to drop 10 percent as China curbs imports, says USDA. 
USDA projects a 2012-13 average U.S. farm price of 65 cents to 85 cents per pound, compared with 91 cents in 2011-12 and 81.5 cents in 2010-11.
Based on the March Prospective Plantings report and average yields, USDA expects U.S. cotton production to rise 9% from last year, even though it figures abandonment could hit 20 percent based on continued drought on the Texas High Plains. Last year, U.S. growers harvested only 64% of their planted acreage, compared with nearly 98% in 2010-11.

Texas Drought Areas Linger

Texas accounts for 52% of U.S. cotton ground in this year's Prospective Plantings report, but last year Texans harvested only 57% of their planted cotton acreage. Their plantings were up 2 million acres last year to 7.55 million in response to high prices.
"Now grain prices are high and cotton prices have dropped off, so the guys that can have gone back to grain" in areas of central Texas and in the Coastal Bend, said Gaylon Morgan, extension cotton specialist at Texas A&M University. However, in the region from San Angelo to Wichita Falls and west, cotton tends to outperform other crops.
The state's drought conditions have lessened from last year, but the Drought Monitor still shows areas of severe to exceptional drought in some cotton-growing regions.
"The rainfall we talked about last week was very much needed and appreciated and probably gave a lot of guys in West Texas enough planting moisture so they should be able to get a pretty good stand," said Morgan. However, the crop will need rain every couple of weeks.
The soil moisture profile in West Texas normally builds from fall until planting. "The problem is, they completely depleted it last year," said Morgan this week.

Planting Ahead of Average

As of May 20, USDA reported 49% of Texas cotton acreage was planted, up from 42% a year ago and the five-year average of 41%. Nationally, 62 percent of cotton acreage was planted as of May 20, up from 52 percent a year ago and the five-year average 53 percent.
About half the cotton grown in West Texas is dryland, and the percentage is higher in several other regions of the state. 
Insurance deadlines for planting vary from April 1 in South Texas into early July in West Texas.
"If they don’t have moisture, in many case they may keep planting and waiting on rainfall," says Morgan. "Two years ago, some areas there got 10 to 12 inches of rain in July. You never know."
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