O.A. Cleveland Weekly Cotton Report: April 29th, 2011

New York futures, led by the expiring May contract and the spot July contract, continued its three week downturn. However, while the new crop December did lose some 500points, the new crop maintained most of its bullish posture owing to severe weather problems in the Southwest and increasing problems for growers in the Midsouth. The downside momentum in the July contract gives some appearance of playing out, but any measurable price increase appears unlikely as physical demand has turned hand-to-mouth. Too, the sinking price of old crop futures is now reasonably in line with the cash price mills that mills are willing to pay. December’s climb back above 130.00 broke above the first level of significant resistant as weekly trading came to a close, thus setting the stage for higher prices in that contract.

Nevertheless, remember my call that at least one half of the new crop should be priced at these levels. If you are willing to accept more risk then price just 25 percent of your crop. December futures at 130.00 cents and above is a hungry market. Feed a hungry market by hedging into it, that is, by fixing your price.

Mother Nature is spinning quite a tale. A large chunk of the Chinese crop needs rain—and fast. Yet, the larger looming disaster is in the United States. The 100 year drought in Texas and Oklahoma does nothing but spread further and further across the region, see http://drought.unl.edu/dm/monitor.html. Most of Texas is facing “extreme drought,” the next to highest drought rating given.

A significant portion of the Midsouth shows to be droughty, but the area so affected has widespread irrigation. Plus, those areas have received moisture for the past three weeks. However, the Midsouth, within the next fifteen days, will experience widespread flooding along the Mississippi River—even if there is no more rainfall in the upper Mississippi and Ohio River Valleys. While Texas and Oklahoma are in the midst of a 100 year drought, the Midsouth is facing 50-75 year floods. All Midsouth states will all lose some cotton acreage to flood water. Hydrologists are comparing the flooding to the 1937 and the 1973 floods. (In 1973 floods along the Mississippi River took New York futures more than 100% higher–from the high 20’s/ low 30’s up to the 70’s). There will not be such a price rise this season as cotton acreage is not as dominant along the River as before. Yet, December could jump another 10 to 20 cents higher, based on that flooding.

Combine the Southwestern drought and Midsouth flooding and the December on the New York ICE market could climb smartly above 150.00 cents. Cotton is a very forgiving crop. Yet, the seed must germinate and develop a good root system before such characteristics can be observed. Texas can only be saved by moisture sufficient to germinate the seed followed by favorable weekly showers over a two week period.  Additionally, in the absence of any subsoil moisture (remember words to describe that drought are “severe, extreme and exceptional”), bi-monthly to even weekly showers during the remainder of the growing season, a scenario that never happens, especially during the late July- August fruiting season. Never is too strong a word, but it’s approaching. Hold on.