Market Forces Looking for Direction

October 22, 2013

Cotton market forces were driving the price mostly sideways while USDA reports were suspended in early October. December 2013 and December 2014 futures were looking for direction.

From the supply and demand forces, the downside risk below 85 cents per pound looks greater than the upside potential. If Chinese policymakers decide to decrease imports from the U.S. or they decide to reduce their surplus stocks, the rest-of-the-world (ROW) stocks appear adequate to hold price below 85 cents.

December 2014 futures could dip toward 70 cents quickly. In early August, December ’13 futures rallied for eight days to reach 93 cents. But, it took only two days to drop below 85 cents. The sudden price decrease is a clear example of the market price characteristics we are currently operating under. That is fast electronic trading by mostly speculative firms (Index and Hedge Funds).

Fundamentally, the next USDA projection is likely to show the potential U.S. crop is larger than the 13.1 million bale September report. Cotton in the Southeast Region has improved during the last six weeks. And, late rains in Texas improved the irrigated crop. Some dryland cotton received a boost too.

The U.S. crop may be in the 13.2 – 13.4 million bale range. Any increase will probably add to the U.S. carryover supply due to weak export demand. A larger U.S. crop than expected will weaken the U.S. price. Too, polyester fiber prices are much lower than cotton in China. The use of man-made fiber is growing rapidly.

Growers should be thinking how they want to sell their 2014 cotton. There are fewer “buyers” than prior to electronic trading.

The Seam market system is a good alternative to locate a buyer and to evaluate the current cash prices. Cotton pools and market associations are available. They also offer alternative pricing methods.

Fewer forward contracts than in the past are being offered. Growers need to understand all conditions specified in “bale” contracts that affect quantity of cotton delivered.

Futures and options contracts offer opportunities to “fix” a price on at least some of your production. However, it is necessary to understand advantages and disadvantages of futures and options. The key is price “fixed”, cost involved, and margin call responsibilities.

The implications of crop revenue type insurance programs are a big part of pricing your cotton. Yet, insurance coverage of production and price is rarely sufficient to cover cash flow requirements


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