Cleveland: Cotton Market will Rebound, Count On It
But perception is reality. At least for now.
August 16, 2011
Dr. O. A. Cleveland
Professor Emeritus, Mississippi
For Bayer CropScience
Dollar Cotton has returned. But, a hint is in order: corn will remain in the $6-$8 range and soybeans will continue to look at $12 plus…and both for the foreseeable future.
Cotton prices will never be far behind, but the longer they are behind, the higher they will go next time. Commodities will continue at this new price plateau for some time yet, and for longer than the FED has promised that interest rates will remain abnormally low. Cotton has its ticket to the high price parties, and it will be punched numerous times yet.
In the face of all the market and global turmoil, cotton, grains and oilseeds are still relatively near historical high price ranges, albeit cotton has slipped. Little has actually changed in the macro-markets for some time. The debt has been there, and it has been growing for a century. The only major change in the macro-markets lies within human emotions. Remember, the one rule of understanding markets: Perception is reality. Forget the facts – they only confuse the issue. Perception is the only reality. Facts only become important in the long run.
What confusing times. but remember this one market axiom. People trade the market and people are emotional. Thus, markets are emotional. They overreact both to the high side and to low side. Markets never move to the point we think they will as human emotions always either overshoot or undershoot. Once emotions, both inside and outside Washington, are reeled in then market predictions will find more validity as the market will be able to trade with “normal” volatility, make that, emotions instead of volatility.
Enough of my sermon. It was truly interesting to me that a number of daily cotton comments last week did not speak one word about cotton itself. The comments were all about the macro markets. Cotton fundamentals had nothing to do with cotton prices. Such comments were a long stretch from the truth. What the commentators were saying was that the market went down because of the Washington fiasco. Yet, the cotton market was really telling us that world carryover was increasing and causing prices to fall. The market’s perception was that USDA would give us a bearish report. The market always knows. It is never wrong. It is just “us” that are wrong.
In its Thursday release of the August supply/demand report, USDA gave us that picture of what the market has been telling us for several months. Supply is strong, demand is weak, and the distance between the two is growing. The result is that carryover is increasing. Thus, prices are being pulled lower. USDA increased its estimate of the U.S. crop nearly 4 percent from last month, increasing it estimate from 16.0 to 16.55 million bales. The large crop estimate allowed USDA to increase its estimate of exports by 300,000 bales, up to 12.3 million bales. U.S. ending stocks were also increased 300,000 bales to 3.3 million. While this level is tight, world ending stocks are scheduled to increase some 8 million bales over the year ago level. It is this significant increase in world stocks that continues to pressure the market.
World production was estimated at 122.71 million bales, actually down 450,000 bales from the July estimate, but 8.1 million larger than the 2010 crop. Principal reductions from last month’s estimates were in Brazil (850,000 bales) and Central Asia (200,000 bales). World ending stocks for 2011-12 were estimated to climb to 52.66 million bales. The price increase earlier this year was fed by concerns that 2010-11carryover stocks would fall to 43 million bales. Thus, world carryover is expected to be significantly larger than the prior year. Again, this is the primary factor weighing on prices. World consumption was lowered 1.6 million bales as USDA lowered its estimate of Chinese and Indian consumption 500,000 bales each. Consumption decreases in Pakistan (200,000 bales) and Bangladesh (250,000) were also noted.
We cannot discount the possibility that December futures could fall to the mid 80 cent level before finding good support. Nevertheless, consumption levels in China, India, Pakistan, Bangladesh and the rest of Asia and the Subcontinent will likely hold the key.