September 14, 2010
December ’10 futures price has rallied about 10 cents per pound to 94.50 cents per pound in the last three weeks. The price has increased mainly because supplies are limited.
Adverse weather conditions in China, Pakistan, India, and, to some extent, in the U.S. are of concern. Too, uncertain trade policies and buying of futures by speculators have a big influence on market prices.
The stage is set for extremely volatile prices. Markets have a tendency to go too high for effective demand under scarce supplies, and that causes textile manufacturers to shift to use less cotton and more polyester. December ’11 futures is already lagging December ’10 prices by more than 10 cents.
Hedge the Hedge
Hedging price fixing strategies is now common insurance to protect against extreme margin calls. In many pricing strategies, the emphasis is on not only protecting the price floor but also to benefit from higher unexpected price moves. Forward contracting for a price floor is a good example. The unusual 20-cent price surge in the last two months is a windfall for producers that bought a call anywhere within 10 cents of the contracted price.
In July, December ’10 futures looked like they were stalled in the 79 to 80 cent range. Now, the next big hurdle of resistance is in the 98 cent to $1.00 per pound range, with the potential for an even higher spike in price. A key factor in pushing price upward, other than scarce supplies, appears to be buying futures by hedge funds.
Crop and Market Developments
The August USDA report reduced Texas planted acreage 100,000 acres to 5.6 million with 5.4 million expected to be harvested. In September, yield was increased to 782 pounds per acre from 768 pounds the month before. The record yield was 843 pounds in 2007.
The U.S. planted acreage was increased to 11.04 million in September, 130,000 more than a month earlier. Estimated abandonment is 265,000 acres or only 2.4 percent. The five year average is 12.0 percent.
In all, the Texas and U.S. cotton crop is doing well. And, if weather conditions remain favorable, a 19.0 million bale crop is still possible. High yield and high price, at the same time, occurs only in rare situations. The U.S. producer is benefiting from being a residual supplier when available cotton is scarce. However, the high price will last only until world growers can respond to high price and increase production. That is usually one to two seasons.