Hold on Wheat, Move on Cotton

January 29, 2013 06:36 PM
Hold on Wheat, Move on Cotton

Economists share their strategies

Wheat markets have taken a pounding since fall, but experts say to be patient. Both old-crop and new-crop prices will likely move higher between now and spring.

"U.S. wheat exports are starting to pick up," says Mike Krueger, president of The Money Farm, a commodity advisory and brokerage firm. "The U.S. and Canada are the only major supply sources left." Particularly encouraging, he says, is that Egypt, the single largest wheat importer in the world, has returned to the U.S. for its supplies.

"It’s possible the market could regain much of the $1 [per bushel] it lost."

This could push old-crop prices higher in the next three to five months, with the possibility of a 50¢ rally on Chicago March futures contracts and a 70¢ rally on the Minneapolis March contract, Krueger says. "Don’t be an anxious old-crop seller," he advises.

The export market is not the only bright spot. In Krueger’s view, the market has underplayed the winter wheat crop damage. As a result, new-crop prices could see a boost this spring. For producers who must sell either old or new crop, Krueger recommends protecting the upside with a call option.

Frayne Olson, ag economist at North Dakota State University, notes that the winter wheat crop is in poor shape, possibly the worst since 1981. This has yet to be factored into the new-crop wheat market. It’s possible the market could regain much of the $1 it lost, Olson says.

"I don’t think we’re out of the woods yet on the drought," says Dan O’Brien, ag economist at Kansas State University. He thinks the July 2013 Kansas City Board of Trade contract is likely to trade in the $7.50 to $8.75 per bushel range during the next few months until there is more concrete information on winter wheat crop conditions and progress in early spring.

Cotton Conundrum. Long gone is the $2 per pound cotton prices of two years ago, and even the 90¢ offered in 2012. Still, marketing opportunities might present themselves in the months ahead, so producers need to be on their toes to sell at the upper end of expected ranges, analysts say.

"For any remaining old [2012] crop, sell on rallies of 75¢ or better," says Don Shurley, cotton economist at the University of Georgia. "For the 2013 crop, contract a portion [20%] of the crop at 79¢ to 80¢ futures."

Texas A&M University cotton economist John Robinson says that if you haven’t made any sales,  get in on the action when December 2013 futures rally above 80¢. Producers can take advantage of price rallies with a put option, he says.

December 2013 futures will likely trade in the 65¢ to 85¢ per pound range between now and summer, and mostly be around 75¢, Robinson forecasts. World stocks have gone from 45 to 50 million bales to 75 to 80 million during the past year, and are now at record levels. In 2011, U.S. stocks-to-use was 22% compared to just 14% a year earlier.

China is "the 800-lb. gorilla in the room," according to Robinson. The price outlook would be even more bearish, he says, were it not for China, the world’s No. 1 cotton producer, stockpiling supplies.

"The only reason why prices are not 30¢ lower is that the world’s surplus is in the hands of China," he adds. China produces about one-third of the world’s cotton and holds about half of the world’s cotton stocks.

China is building stocks so it can support prices for domestic cotton producers at $1.30 to $1.35 per pound, says Gary Adams, chief economist for the National Cotton Council. As a result, China has tripled its stocks.

"It’s possible that China has overbought on imports," Shurley says. "China now has more cotton  in reserve than it uses in an entire year. Those stocks will eventually enter the supply pipeline. The uncertainty of when and how hangs over the market like a dark cloud."

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