Volatile Market Price Challenges Marketing Skills

January 17, 2012

The January USDA estimates slightly increased the surplus world carryover supply of cotton for the 2011/12 season from last month's already burdensome supply. Although China has a substantial accumulation of cotton in reserve, their support prices are relatively high and will likely cause Chinese textile manufacturers to use more polyester fiber and less cotton.

World cotton use was reduced more than production, pushing expected carryover stocks up to 58.4 million bales. That is a substantial 13 million bale increase from the season before.

Expected world carryover stocks, as a percent of use, is 53.0 percent -- the highest level in 3 years. Producer prices may average 86 to 94 cents for the 2011/12 season, according to USDA estimates.

March 2012 vs. December 2012 Cotton Futures Settlement Price

Cotton futures prices are volatile because of the uncertain interaction between non-users (speculative trading mainly by Index and Hedge Fund managers) and the large increase in supply and weak demand for cotton fiber.

Despite the sluggish demand, cotton futures have rallied some 10 cents in the last month from the mid-eighties to around 96 cents. The price increase appears to be primarily from forces outside of the basic supply and demand driven market price.

Producers need to develop a market plan that encourages "fixing" cotton prices during favorable price rallies. Sharp price increases are likely to be followed by even greater price decreases.

Future prices can turn sharply up or down because of the mix of non-user traders, foreign financial developments, change in strength of dollar index, and uncertain developments in trade policies by the largest international buyers and sellers. The producer price for cotton can gain or lose $50 to $100 per bale in just a few days from unexpected forces beyond the direct cotton market.

Also, with U.S. growers producing only 13 percent of the world's cotton, the main fundamental market developments stem from foreign countries. Cotton production and consumption in China and India are the primary long-term market forces influencing the export demand for U.S. cotton.

Producer prices that cover production costs are essential. A market plan to minimize risk and maximize income will require the ability to understand and use the best marketing tools available.

A Cotton Price Risk Management Seminar coordinated by Cotton Incorporated will be held on Wednesday, February 15, 2012 at the Peabody Hotel in Memphis, Tennessee. 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. Dr. O.A. Cleveland will be discussing the Cotton Market Outlook. Mike Stevens will be the discussion leader. No attendance fee; lunch will be provided. To register contact Kay Wriedt at 919-678-2271


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