Cleveland: Examining Cotton's Movement Last Week
Cotton prices must trend higher or come 2014 the market will be in for a repeat of 2010 with skyrocketing prices and a loss of more market share at the consumer level.
July 24, 2012
With less than two weeks remaining in the 2011-12 cotton marketing year prices on the New York ICE contract remain locked in long standing 65-75 cent trading range. A tighter six cent range, 67 to 73 cents, has corralled most of the trading. Recently, the upper end of the range has seen most of the trading, but the market’s inability to break above 75 cents is drawing more and more attention. Yet, most likely this trading range will hold going into the August 10 release of the USDA August supply demand report. Bearish cotton fundamentals suggest lower prices if the trading range is broken. The Indian monsoon is still below normal; however, the forecast for the coming weeks suggests the rains are coming. Nevertheless, that crop has been damaged. Technicals are mildly bearish, but a breakout to the upside is easily possible as well. Macroeconomic economic signals are bearish, or are they? Yes, they could be even more bearish. However, more positive signals pop up every week and every month. Housings starts, an excellent indicator of the demand for cotton, has turned positive. Once macroeconomic signals can build a month on month on month improvement, then cotton demand will increase. So, in which direction do cotton prices trend?
History does tell us that ranges bound markets diligently seek a new range, either higher or lower. We only know that prices are either going higher or lower. The bearish cotton fundamentals make an excellent case for lower prices, except for one key typically overlooked fundamental, and that is the competition for production resources. Cotton prices are now so out of line with grain and oilseed prices that the comparable price ratios are in totally new territory. Cotton’s record high in 2010 and this week’s record high prices for both corn and soybeans were clear indicators that Southern Hemisphere cotton plantings are already shrinking and planting season is still four plus months for that crop. In fact, indications are that 2013 U.S. acreage will be down 25% and world plantings could be off as much as 30%. These reductions, should they materialize would represent drastic adjustments.
Thus, cotton prices are more likely to move higher. These and other issues will be discussed next week at the annual Cotton Forum at the New York Cotton Exchange (ICE). The discussion will be aired live on Friday, July 27 at 7:30 AM CST. The group discussion can be heard live on radio station KFLP 900 AM Floydada, TX and KZIP 1310 AM Amarillo, TX.
Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.