Robinson said he could envision a conspiracy theory in which a Chinese bureaucrat starts thinking about all that cotton and decides to sell two to four million bales. “That would be a surprise. The world price would come down and the futures market would come down.”

He said the downside risk would be “at least 10 cents a pound.”

He doesn’t anticipate that happening. “Inertia rules the day. Doing nothing is the easiest thing to do.” China may be hoping that a short crop somewhere will open up a market and they can replace the entire shortage with their stockpile. A drought in India could be such a catalyst.

Even with a catastrophic crop year somewhere, China’s stockpile filling the gap would put a cap on upside price movement.

All those factors together support Robinson’s contention that cotton prices will continue to move in a sideways pattern—70 cents to 80 cents—with downside risk. “The futures market has been signaling that. That downside risk is at least 10 cents.”

Even with little hope for a rally, he expects U.S. acreage to increase in 2014, especially in Texas. Weakening grain prices will be a significant factor, and Texas could plant from 500,000 to 750,000 more acres, which could push U.S. acreage to 11 million, “even though it’s still dry in the Southwest. But prospects look better.”

He said with a normal abandonment, harvested would come in at about 9 million acres and production would run about 16 million bales.  Export would take about 9 million bales, 1 million less than usual as China uses more of its own production. That leaves 6.4 million bales of ending stock, “double the preceding year. With a stocks-to-use ratio of 50 percent, price weakness could follow. So, I am not bullish. Expect no rally.”

He said farmrs could consider forward pricing, hedging, and options to protect some price. He also urged farmers to consider all the tools available to them—insurance, futures, options, and pools—in various combinations to find a strategy to protect against downside risk. He said options have been relatively cheap and provide price protection.

He also noted that the new programs available in the farm bill may move coverage up. “This is a new world with insurance and risk management,” he said.

He also recommended farmers look at their production costs and if they can forward price part of their crop to protect price early, they should consider it. “Don’t hedge the entire crop, just some of it,” he said.


Also of interest:

Cotton market outlook

Adhering to market fundamentals advised for cotton futures trading

Restoring China’s cotton consumption is key to U.S. market