As cotton farmers prepare to plant their 2004 crop they might better keep one eye on the weather and the other on the futures market.
“If December 2004 futures rise to the 69 cents level before June, be ready to price some, maybe most, of your cotton,” advises Texas Extension cotton marketing specialist Carl Anderson.
Anderson offered a marketing outlook at the annual Southwest Crops Production Conference and Expo in Lubbock recently and said increases in U.S. and world cotton acreage likely will cause price reductions. “A 10 percent increase in U.S. acreage this year may produce an 18 million to 20 million-bale crop,” he said. Coupled with anticipated increases across the cotton-producing countries, carryover stocks could increase “sharply to around 6 million to 7 million bales, similar to 2001/2002. The price would be less than loan rate.
“The extreme market uncertainty along with a restructured market environment is a strong signal for growers to develop marketing and pricing strategies early to reduce exposure to sudden adverse price moves,” he said. “The farm program provides a reasonable safety net.”
He said growers could do better than loan rate, however, if they work the market. “When growers intend to plant around 10 percent more cotton worldwide, chances are good for a season with more cotton and at least a 10 cents to 15 cents drop in December futures.”
That drop would bring cotton from the mid-60-cent level in mid-winter to the low 50-cent range and near the 52-cent loan rate by October or November.
A 10 percent acreage increase would push world production from 92.65 million bales from the 2003 crop to 99.5 million bales in 2004. Added to a 32.36 million-bale beginning stocks, total supply would be more than 131 million bales. Anderson said the “A” index price would fall to around 59 cents a pound, a steep decline from the near 71 cents index on the 2003 crop.
He said world production in 2003 was up by 4.4 million bales compared to 2002. Consumption dropped by just less than 1 million bales, but ending stocks also declined by 4.3 million bales. The “A” index rose 15 cents per pound.
Anderson said farmers find an “export-driven market hard to predict. We could see a $100 per bale price swing between contract high and lows. Expect roller coaster dips and rallies, as the market will tend to move too high or too low.
Anderson said producing high quality would take some of the uncertainty out of the market.
“Look for better varieties that produce better quality cotton and higher yields,” he said. “Look for something that consistently brings at least 4 cents per pound over the 52 cents loan value.”
He said the market wants 35 staple and higher, 28 to 32 grams /Tex. “At 25 grams/Tex expect a big discount. Mic should be around 4.3.”
Anderson said China remains the market catalyst. “Chinese cotton warehouses must be empty before mills get licenses to import. A spurt of buying should be a trigger if the United States has cotton to sell.”
He said a 70-cents per pound range “is as high as I can see it going. We'll export 11 million bales from the 2003/2004 crop. We'll use 6 million and we can make 19 million bales. A 2 million-bale carryover will push prices down.”
Anderson said mill buyers could look to build stocks while markets “are on a slide. That could mean a rally of 5 cents on the old crop, maybe 4 cents on the new.”
He said bad weather could result in a stable crop for 2004. “Falling stocks would result from a disaster and that's unlikely. The possibility is strong that stocks will increase and prices will drop.”
Anderson said options trading offers growers an opportunity to reduce price risks. “Just after harvest, farmers should think about the year ahead. If they work smarter and not necessarily harder, they can make money in the cotton market.”
He said buying a December 2004 put at 62 cents a pound would cost about 2 cents a pound. If the price drops to 50 cents, the option value increases from a 2 cents cost to a 12 cents advantage. The gain for the farmer would be 10 cents per pound. If the price drops to 55 cents, the gain would be 5 cents.
“In an uncertain export-driven market, cotton options are likely to be used more to insure price,” he said.
Anderson offered three rules for cotton marketing: 1) “Markets are not going to give you anything. 2) “You have to take pricing opportunities from the market. 3) “Develop year-round plans to price commodities favorably.”
Anderson said from January 6 through February 10 of this year “cotton prices dropped one cent per day. The market can flip at any time, so farmers have to be quick.”