Cotton futures prices have traded in a fairly
narrow 72-75 cent per pound range since January 4,
2010. The market appears satisfied with current
cotton supplies worldwide.
Because of higher prices since last September
2009, U.S. cotton acreage is expected to increase
some 10 percent from the 9.1 million the year before.
The resulting 10.0 million acres may produce 14-16
million bales, about the same as projected use.

Soil moisture conditions in Texas are much better
than have existed for the last two years. Near ideal
growing conditions in 2007 produced a Texas crop of
8.25 million bales, followed by 4.45 million a year
later, and an estimated 4.90 million this season due
mainly to dry weather. Clearly, the Texas cotton
crop has substantial impact on size of the U.S. crop.
The January USDA supply/demand estimates
were little changed from a month earlier. Production
in China was increased 500,000 bales to 32.0 million,
and the crop in India was cut 300,000 bales to 23.5
million. World ending stocks remain adequate at
51.7 million, but down from a surplus 60.9 million a
year earlier.
Market support stems from a sharp decline in
world stocks-to-use from 54.8 percent a year ago to
45.23 percent now, the lowest level since 1994/95.
Yet, the supply of cotton is sufficient for prices to
trade sideways in the mid-seventy cent level. With
acreage expected to increase, December 2010 may
continue trading below 80 cents this spring, but well
above the 10 year average December contract high of
72.5 cents.
The key to strong cotton prices is exports, which
make up 75 to 80 percent of total use in the U.S. In
the first week of January, net U.S. upland cotton sales
of 437,000 bales were a marketing year high.
Estimated exports of 11.0 million bales from the
2009 crop may be exceeded by August 1.
The cotton market can shift without warning
because of complex market forces. Today, the
market is not only made up of supply and demand,
but also speculators (index funds and hedge funds),
and trade and domestic policies of all countries.
Thus, price levels and basis are highly volatile.
Therefore, producers need to plan ahead how they
are going to manage price risk. Physical cotton can
be sold by contract, use of CCC loan programs,
marketing pools, marketing associations, or
individually. The use of futures alone to manage
price risk includes tremendous margin risk. The
futures price can turn drastically overnight in either
direction. Options premiums are expensive because
of the price volatility. As a result, spreads of buying
and selling options are frequently used along with
purchase of puts and calls.