What is in this article?:
- Wild cotton market ride may be repeated for 2011-2012 crop
- Could price destroy demand?
- Does the world need 17 million bales?
- On paper it looks like the fundamentals of a more normal supply and demand are kicking in. However, the days of a simple cotton market are gone for now.
- The return of volatility to a once staid cotton market is “based on unknowns more than anything else."
- Marketer believes U.S. cotton acreage will reach 13.3 million acres, but extraordinary pre-planting prices could change people’s minds and more cotton could be seeded.
Does the world need 17 million bales?
“Does the world need and want 17 million bales?” he questioned in his paper prognostication based on a predicted worldwide cotton acreage explosion.
That is a fundamental, paper look at the situation. Muddling it is a never before seen $1.30 per pound pre-planting price to growers.
All of this, he said, is creating a new marketing paradigm. What once was a relatively straightforward, trouble free cotton marketing system has become so risky that it is creating a “cloak and dagger” atmosphere. He said because of the risks inherent to the wildly fluctuating market, Allenberg has become selective with whom it does business.
That is exemplified by a contracted cotton grower recently failing to deliver cotton to Allenberg that could eventually cost the cotton merchant $12 million, if a settlement is not negotiated.
Tancredi used the example to tell growers that they should be careful with whom they do business. Counterparty risk management has become No. 1 on a grower’s risk management chart of importance, ahead of margin and market risks.
When the market takes basis swings of 2000 on and 5000 off, risk management takes on a new look, he said. Capital becomes difficult to generate in those market swings. He said a market that swings 40 cents in a week could force people to bail out of deals.
“Predictability is out of the market,” Tancredi said, making it far more risky for everyone.
He recommended growers lock in a profitable price with a marketer they have thoroughly investigated before planting and “watch and wait” to see what happens in the world. A monsoon or other natural disaster in the world could revive the crazy 2010-2011 market for this new crop. Consumer spending that saw the run up in cotton prices may falter in the wake of rapidly rising energy costs.
There is simply too much uncertainty in the world, citing unrest in the Middle East and escalating oil prices. If filling a car cost $80, consumers will think twice about buying apparel or other goods.
He also does not believe the U.S. economy is turning around just because someone says it is, citing ongoing high unemployment, a continued weak housing market and the price of fuel.
Trancedi said Allenberg has had more producer groups and textile mills come to its offices for advice in the past six months than he has seen in the previous 10 years.
“All want to know how they cannot be exposed in this market. They want to learn how not to make dumb decisions and to know how we are not making dumb decisions … all logical questions,” he said.
“Volatility is not going away. We cannot get comfortable yet.” But Tancredi added, “We have to plant the cotton.”
Fundamentals of supply and demand will return to the market. The question is when.