The only good news in cotton these days seems to be that the price has managed to hold its ground despite a very bearish USDA crop report in December.

The bad news began with USDA making a major adjustment in forecasted U.S. exports for the upcoming marketing year, dropping them by 750,000 bales to 12.25 million bales. USDA also increased U.S. cotton yields to 843 pounds per acre, which raised production to 13.6 million bales. On top of that, the agency decreased domestic use by 100,000 bales, to 4.3 million bales.

The result was that ending stocks for U.S. cotton rose by 900,000 bales to 7.1 million bales. “In a normal supply and demand situation, a 900,000-bale addition to ending stocks would be decidedly bearish,” said John Robinson, Extension economist, Texas A&M, speaking at the Ag Market Network's December teleconference. “But the market has already taken a huge beating, so we didn't see the price reaction you would usually expect.”

Globally, USDA lowered its forecast of consumption by 2.75 million bales, over half of which came from reductions in China. Lower consumption is due to a global recession which has led to reductions in purchases of cotton apparel. “The bottom line is that the world stocks-to-use ratio is over 50 percent, which is historically associated with weak prices.”

“There's nothing out there to support a bullish argument, except that prices have stopped going down,” said Mike Stevens, an analyst with Swiss Financial Services. “Cotton has not followed fundamental news in several months.”

But there seems now to be a shift in market psychology, Stevens said. “When a market fails to go lower following a bearish report, or fails to go higher after a bullish report, these could be warning signs that we are on the verge of a reversal, at least technically.”

Stevens says many traders “are now beginning to suspect that the cotton markets may have already discounted the sharp drop in worldwide consumption — 7 million bales since the September report.

“We could have a bone-jarring technical rally in cotton, just because we've been so bearish for so long. There's a good chance that we have now adequately discounted the extremely bearish economic news.”

A rally could come on the news of reduced cotton acreage in 2009. Noted Stevens, “A recent survey of over 4,000 Chinese producers in 15 provinces indicate an 18 percent drop in planting intentions this year. Informa Economics has estimated U.S. cotton acres at 7.5 million acres, which is down 20 percent from this year.”

Stevens noted that this would be the smallest U.S. planted acreage since USDA started keeping planted acreage numbers in 1909. (USDA has been recording harvested acres since 1866).

“Only twice in recorded history have we had smaller harvested acres than 7.5 million acres, and one of those years was just after the Civil War,” Stevens said. The other was 1983.

O.A. Cleveland, professor emeritus, Mississippi State University, warns producers not to be overly bearish. But don't take that to mean he's bullish, either. “If we break 40 cents, I'd have to be very concerned about the low 30s. I think there is a light at the end of this tunnel, but I think we still have some dark days ahead.”

Two things to watch for, according to Cleveland, are consumer income and lingering effects of the food crisis. “Unfortunately, declining consumer income is going to continue for at least another six months to a year. The food crisis will work to support cotton prices, but in the meantime, for one if not two more years, we will see a small acreage planted to cotton here and around the world.

“The problem that cotton has that other commodities do not is that we have a very large excess supply around the globe.”