March 23, 2010
Cotton prices have increased substantially in the last six weeks. Prices are supported by decreasing supplies caused by a smaller world crop and increased mill use in 2009/10, compared to the season before. World stocks-touse are the lowest at 44.4 percent since 37.8 percent in 1995/96.
The December ’10 futures price rally in February and early March is reaching for 75 cents per pound; yet, December is far behind May futures. The next major hurdle for December ’10 futures will be at the 78 to 80 cent range. How the market reacts ahead of and shortly after the March 31 USDA prospective plantings report of cotton acreage will be a major clue to cotton growers for placing a floor under the market below or above 80 cents.
December ’10 has the potential of moving into the mid-eighty cent range. But, will demand be strong enough to keep up because of a higher price. And, polyester prices are always ready to increase competition.
Cotton plantings in the U.S. for next season are currently thought to be in the range of 10.0 to 10.5 million acres, compared to all cotton acreage of 9.15 million a year ago. Cotton production for the 2010/11 crop appears to be in the 16 million bale range. Total use could be about the same. That leaves U.S. carryover about 3 to 4 million bales for another season.
December ’10 futures price for cotton was 75 cents per pound on March 22; December ’10 corn, $4.00 per bushel; and November soybeans, $9.45 per bushel. At planting time, the cotton price is barely competing with corn and soybeans for acreage. The competition for acreage still remains strong for corn and soybeans, compared to cotton. Estimated production costs run in the $500 to $600 per acre range for cotton. The cost for soybeans is less than $200 per acre. The financial risk for cotton is relatively high.
Growers need to decide at what price level and how to price their 2010/11 cotton. Although producers do not individually control price, they do control when and how to price.
The extreme volatility of the current cotton futures prices has increased the risk and cost of pricing for future delivery. Where in 2007 the premium for December atthe- money put at planting time was 3.5 to 4.0 cents, it is now around 6.0 cents per pound. For instance, in 2007 a 2-cent December ’07 put was about 4 cents out-of-the money. Currently 2 cents will buy a December ’10 put about 10 cents out-of-the money.
A Cotton Price Risk Management Seminar coordinated by Cotton Incorporated will be held on April 7, 2010 at the Holiday Inn Hotel & Towers, 801 Avenue Q, Lubbock, Texas. The instructors are Dr. Carl Anderson and Dr. John Robinson. They will discuss when and how to use a variety of option strategies including: fences, 3-ways and calendar back spreads. There will not be an attendance fee and lunch will be provided. To register contract Kay Wriedt at 919-678-2271 or firstname.lastname@example.org.