Cotton Hits A Wall At 65 Cents

While cotton futures prices are still in the long standing 62 to 67-cent trading range, prices made a nice “recovery” over the past few weeks. Prices (Mar16 futures) have “rallied” from the 60-cent threat back in October, and from just below 62 cents on Nov 23, to almost 65 cents on Wednesday this week before faltering 104 points (1.04 cents) yesterday.

Yesterday’s disappointing decline is likely due simply to some of the bullish ”energy” running out after the nice uptick we’ve experienced recently, a not so encouraging export report this week, and perhaps this week’s USDA production and supply/demand numbers.

Export sales for the week ending Dec 3rd were 85,500 bales—down over 200,000 bales from the record of the previous week. I don’t view that as negative per se; you’re not going to have a high level of sales every week. Shipments were 115,000 bales compared to 90,000 the previous week.

USDA released its December numbers on Wednesday. Prices went to near 65 cents that day, but then retreated on Thursday (yesterday). The US crop estimate was lowered 250K bales. US average yield was lowered from 782 to 768 lbs/acre. The estimate of exports for the 2015 crop year was lowered from 10.2 to 10.0 million bales—this likely being just a reflection of the lower crop size, and reduced exports and demand worldwide.

World cotton Use (demand) was lowered to 111.39 million bales—the 4th consecutive month that Use has been revised downward. Whether this represents an actual reduction in use, or USDA just fudging earlier numbers—it shows that demand is weaker than anticipated. Use in China was revised down by 500K bales, India down 200K bales, and Pakistan down 150K bales. However, Bangladesh was revised up 200K bales and Vietnam up 450K bales.

World production was dropped almost 2 million bales with reductions coming in not only the US but also China, Turkey, and Pakistan. Projections for the India crop were unchanged. Overall, projected World ending stocks for 2015-16 were lowered 1.7 million bales including 450K bales in China.

China’s projected imports were lowered 250K bales to 5.5 million. This probably coincides with the lowered expected use.

As mentioned, the US crop was reduced by 250K bales. Most states held to their November estimate. A few saw yield estimates increase. Yields in the Southeast, with the exception of Georgia however, have tumbled from earlier projections. Most notably, the Carolina’s and Virginia have been hit hard in yield and fiber quality by weather and harvest delays. This season in Georgia, and particularly as the harvest and classing has progressed, we are seeing higher than normal deductions in grade for seed coat fragments, prep, and color grade. Micronaire is also higher than normal. High mic is typically caused by plant stress.

Growers are reminded that the LDP (or POP as it’s often called) acts as protection against low prices. The LDP is received in lieu of putting cotton in the Loan. If the Adjusted World Price (AWP) is less than the Loan Rate, that’s what generates the LDP, and that also means that cotton can be stored in the Loan, free of cost to the grower. If you take the LDP and then continue to hold cotton in storage, you have no protection from prices going lower and you also accrue storage charges. If your plan is to hold cotton for higher prices, you would likely be better off to just put the cotton in Loan rather than take the LDP. With the cotton in Loan, if the AWP remains below the Loan Rate, you’ll have a MLG (Marketing Loan Gain)—the math works exactly the same as with the LDP.

Here’s what the LDP has been each week since the beginning of October. Prices and the LDP move in opposite directions. The LDP goes up because prices have gone down. The LDP goes down because prices have gone up. If you take the LDP, to play that game you need to understand the timing of what to do. You need to be prepared to sell those bales or otherwise, just recognize that you no longer have protection for declining prices and you’re incurring storage charges.

Most recently, for example, the LDP was 4.05 cents/lb for the week ending Dec 4. It dropped to 2.96 cents effective today. It dropped because prices were higher this week than the week before.

Growers are reminded that the LDP (or POP as it’s often called) acts as protection against low prices. The LDP is received in lieu of putting cotton in the Loan. If the Adjusted World Price (AWP) is less than the Loan Rate, that’s what generates the LDP, and that also means that cotton can be stored in the Loan, free of cost to the grower. If you take the LDP and then continue to hold cotton in storage, you have no protection from prices going lower and you also accrue storage charges. If your plan is to hold cotton for higher prices, you would likely be better off to just put the cotton in Loan rather than take the LDP. With the cotton in Loan, if the AWP remains below the Loan Rate, you’ll have a MLG (Marketing Loan Gain)—the math works exactly the same as with the LDP.

Here’s what the LDP has been each week since the beginning of October. Prices and the LDP move in opposite directions. The LDP goes up because prices have gone down. The LDP goes down because prices have gone up. If you take the LDP, to play that game you need to understand the timing of what to do. You need to be prepared to sell those bales or otherwise, just recognize that you no longer have protection for declining prices and you’re incurring storage charges.

Most recently, for example, the LDP was 4.05 cents/lb for the week ending Dec 4. It dropped to 2.96 cents effective today. It dropped because prices were higher this week than the weCapturing the most money in your pocket is the result of timing. If prices are going up during the week, you can be assured that the LDP will decline for the following week—they will offset. So, the only way you can gain is to be prepared to take the LDP and sell those bales while the market is up and before the LDP can adjust down.

If prices are trending down during the week, the best strategy is to just hold off because the LDP will be higher the next week. The LDP is your friend. If prices are going up during the week, you could take the LDP and sell those bales while prices are up and while the LDP is higher, before it goes down the following week.

Assuming premiums for good quality cotton, here’s what the “total money” looks like presently:k before.

This total is 2-3 cents less than what it would have been yesterday, or Wednesday before the market went down yesterday, and today and before the LDP went down today.

Source:ufl.edu