Cleveland: Prices Slide, But December Looks Promising
Cotton prices showed a chink in their armor last week, although adverse U.S. planting conditions could signal price surges in the near future.
April 19, 2011
By Dr. O. A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
Cotton prices suffered another chink in its armor last week as the old crop May could not climb back above 200.00 cents and the July contract traded as if it would never see that level again, trading as low as 176.46. However, the new crop December contract was holding to the initial gains it made just after the USDA March 31 planting intentions report. Trading in the old crop May and July contracts looks to move some 10 to 20 cents lower based on technical prospects at this time. Export sales are being made, but as USDA hinted in last week’s supply demand report, new sales are being offset by buy backs, limited cancellations, and new crop sales as a replacement for cancellations. Additionally, both fundamentals and technical trends have December in an upward mode.
With first notice day approaching for the May contract, the market leadership appears to have been handed off the new crop December contract. It would be typical for July to take the leadership position.
But given the extreme tightness in both foreign and U.S. stocks, coupled with the mix of being in the midst of planting season that is facing an extreme to exceptional drought, the December contract has now become the talk of most traders. Well more than one half of the cotton production area in Texas and Oklahoma is classified as under extreme drought. Likewise, more than one half of the Mid-South is classified as suffering from severe to extreme drought. The remaining portion of the Mid-South is classified as abnormally to moderately dry. Weekend rains are expected to provide considerable moisture to the Mid-South. Yet, it is the simple lack of moisture in West Texas that is so troubling to the market. Most of the Mi-South cotton acreage, at least that portion that is dry, has access to irrigation. It is the vast dryland Texas acreage, as well as the large acreages in Texas that have only partial irrigation, that the cotton market is closely watching.
The portion of South Texas that is facing extreme drought typically needs a solid soaking no later than Cinco de Mayo (May 5) for the crop to have a chance. Much of the Coastal Bend is facing only abnormally dry conditions and has time. The High Plains and a significant portion of the Rolling Plains needs good moisture, and typically receives such about June 1. Yet, with the area so very dry now, even if the June 1 moisture comes, the crop will require a series of timely showers in July and August to account for the absolute lack of subsoil moisture. That is, the region would need a series of rains that almost never come during those months. Too, the current drought is expected to last until July.
The drought situation can be viewed at the following link: http://drought.unl.edu/dm/monitor.html.
While I am definitely not one to suggest that the bull is ready for the dinner table, I do suggest, as previously commented, that it will be the December contract that will take the market through the comings months. December futures will likely trade between 115.00 and 145.00 depending on the actions of Mother Nature’s rain making desires. A few wet spots in West Texas can take a few points off the board, but a good soaking rain would take 15.00 cents away. Without rains, the path to 145.00 is wide open.
You should have at least one half of your 2011 crop priced by now. Hopefully, the entire 2010 crop has been priced. If not do it now.