Bayer CropScience-O.A. Cleveland Weekly Cotton Commentary

Cotton futures hit 194.55 Friday, surmounting the all time high of 190.00 cents, established in 1864, during the U. S. Civil War era.  However, the advance stalled above 190.00.  With first delivery notices on the March contract to be issued after the close of business next Friday, the market should be expected to surmount that all time high and ease above its next psychological bearer, the two dollar level.  The coming week should light up the sky and the deck is stacked in favor of a new record.  Look for both the old crop and new crop prices to advance.

The supply tightness, coupled with expanding demand, is the base of this price explosion, but this momentary explosion to two dollars, basis the March, May and July contracts, has its roots in the very large volume of mill on‑call sales whose price must be fixed on one of those respective months.  In fact, the on‑call price fixations that must be made represent a substantial portion of the old crop open interest;  March, 18 percent;  May, 58 percent; and July, 100 percent.  Such price fixations require the Buying of futures.  The February world supply demand report was a non factor.  The monthly report had only very minor changes with not any changes in U.S. fundamentals.  Changes to non‑U.S. growths were captured in a 30,000 bale decline in world carryover, now estimated at 42.81 million bales.  This represents a stocks‑to‑use ratio of 37 percent.  Longer term, while a ratio of this level is positive for price; it most likely supports the 2011 and 2012 new crop prices at or near the 95.00 to 135.00 cent level.   Yet, cotton prices must remain competitive with grain and oilseed prices. Too, in the short term the December contract will march with the old crop contracts.

 The National Cotton Council’s plantings intentions report showed U.S. growers had intentions to plant 12.5 million acres.  The historic price increase since the survey was conducted begs for additional acres.  Look for accrual plantings to be in the 12.8 to 13.0 million acre range.    Yet weather controls the final production level and West Texas growers are using phrases such as, “the driest I have ever seen,” to describe the current moisture situation.  If this, or similar conditions continue, then the U.S. will be challenged to produce 19.0 million bales.  Couple this with the spreading drought in China’s major cotton producing regions, and the combination of both of these situations maturing would push the 2011 price above the mentioned 135.00 cent top.  Yet, a bumper world crop would drive December back to the 95.00 cent level. Nevertheless, the odds are on the side of maintaining prices well above 100.00

 The reality of 130.00 for the 2011 new crop, basis the December contract begs for grower pricing.  So maybe you do not get the top, but then maybe you do.  Yet, December at 130.00 insures a very solid profit that would carry a grower for two years even if the bottom were to drop out.  Yet, the bottom will not fall out anytime soon.  Nevertheless, be prepared for some slippage in the market after next Friday’s First Notice Day.  The market should correct lower, but only long enough to begin another charge just as strong as the current one.

Regards

O.A. Cleveland