December 14, 2012
Cotton perspective for the 2013/14 season is headed for a year of reducing stocks, increasing demand and the prospects of a price range between 80 to 90 cents. Indications suggest that world cotton production will slow some 10 to 14 percent and use increase by 3 to 5 percent in the 2013/14 season.
Lower price levels than a year ago and much higher grain and soybean prices are attracting acreage away from cotton to alternative crops. However, the record world cotton supply is expected to dampen the potential price increase. The world carryover surplus of stocks compared to use increased sharply from 43 percent stocks-to-use (s/u) in 2010/11 to a record 75 percent in 2012/13. A s/u of 40 percent is a sufficient inventory.
It will likely take two years for the excess world cotton supply to decrease enough to support producer prices near the U.S. cost of producing cotton.
The key to price movement higher depends on how Chinese policies in using their enormous cotton supply will be managed. China now has 47 percent of the estimated world carryover stocks of nearly 80 million bales. The Chinese have enough cotton stockpiled to supply their use for a year. Cotton stocks in China,
relative to use, have not been this high since 1999. If the Chinese slow down in buying cotton to import, the market will lose considerable support.
Also, foreign production in 2012/13 is expected to be only 3.4 million bales short of foreign use. As a result, foreign countries can produce almost enough cotton to satisfy their use.
Given plenty of cotton, uncertain Chinese cotton policies, cotton price movements are expected to be fast and volatile before planting time next spring. Futures traders include both large amounts of speculative index and hedge funds and cotton industry producers, handlers and users of cotton.
Producers need to develop a marketing plan and try to take advantage of price rallies. Options contracts on cotton futures are a lower risk and viable pricing strategy than futures contracts alone. The big advantage of put options is that they allow setting a price floor. Yet, you can take advantage of a potential price increase when buying a put. You pay an option fee; but, there is no margin calls associated with an option at a given strike price.
For information on using options click on the following concerning Introduction to Options: http://agecoext.tamu.edu/fileadmin/user_upload/Docum ents/Resources/Risk_Management/rm2-2.pdf
Also the following discusses Hedging With a Put Option: http://agecoext.tamu.edu/fileadmin/user_upload/Docum ents/Resources/Risk_Management/rm2-12.pdf
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