March 9, 2012
The 2011/12 March world cotton supply and demand estimates by USDA indicate a further increase in cotton supplies and less consumption than a month ago. The result is a 1.6 million bale boost to a 62.3 million bale surplus in global carryover stocks.
Domestic use for China was reduced 500,000 bales to 43.5 million. And, ending stocks were raised almost 2 million bales to 20.1 million. A year ago, China’s ending stocks had been reduced to only 11.6 million.
The 2011/12 U.S. cotton supply and demand estimates reflected a 100,000 bale reduction in use to 3.4 million bales, compared to 3.9 million used a year earlier. Thus, U.S. ending stocks were raised 100,000 bales. While 3.9 million bales carried over is fairly small, it is substantially above 2.6 million last season. Yet, the average price range estimated for producers was raised 1 cent on the lower end to 88 to 93 cents for the 2011/12 season.
Even though export shipments have been excellent in recent weeks, December ’12 futures have been trading sideways around 91 cents for the last two weeks and well below 94 cents for the last month.
The Cotlook “A” Index which represents a simple average of the day’s cheapest five Far Eastern price quotes for cotton classed as middling 1-3/32 inch is also weak, hovering near $1.00 per pound. A world stocks-to-use (s/u) of around 40% seems to be a benchmark between a stronger or weaker market.
The s/u percent is calculated each month by taking the estimated world carryover stocks projected by USDA for the end of the season (July 31) as a percent of world use.
The March world s/u at 57.3% suggests much lower prices ahead for cotton, provided weather conditions worldwide allow average yields. Weak demand is expected to continue because of strong competition from man-made fiber following the extreme artificial run-up above $2.00 per pound cotton in the first half of 2011.
When supplies increase a second year in a row, the cotton price declines sharply in the last half of the calendar year.
In your marketing plan, consider downside price risk versus upside potential. Don’t try to pick the market peak. Try to use scale up pricing during market rallies. The objective is to minimize risk and maximize profits.
Cotton futures and option markets offer the flexibility to custom build a selling or buying program. Options may be used alone, with forward contracts, and with futures. They can be used in combination with contracts and futures to develop pricing strategies.
On March 9, December ’12 futures put options could be purchased anywhere from about 6 cents per pound at-the-money to around 3 cents, some 7 cents out-of-the-money. Even a 10 cents out-of-the-money December put for 2 cents would be good downside price insurance if price drops to 70 cents by harvest time.
A Cotton Price Risk Management Seminar coordinated by Cotton Incorporated will be held on Wednesday, March 28, 2012 (from 8:30 a.m. – 5:00 p.m.) at the Overton Hotel & Conference Center, 2322 Mac Davis Lane, in Lubbock, Texas. Dr. Carl Anderson and Dr. John Robinson will discuss when and how to use a variety of option strategies including: hedging strategies based on various price scenarios, and integrating crop and revenue insurance. Mike Stevens will be the discussion leader. No attendance fee; lunch will be provided. To register, contact Kay Wriedt at 919-678-2271 or firstname.lastname@example.org.