Cotton market breaks through important support level

The cotton market (December futures) broke through the important 54-cent support level on Sept. 1, and then broke through the 53-cent level.

For most producers, this year’s crop will be off considerably from last year and, combined with much higher production costs, the cost per pound of lint is going to skyrocket.

Costs on even the irrigated crop are going to be high due to higher diesel prices, increased (above normal) number of applications, and/or lower than normal yield due to lack of time for applications.

Since the most recent high of 55.6 cents per pound on Aug. 25, the market declined seven of the next 10 trading days. The recent close below 53 is the lowest level since mid-July. The talk of high prices due to the short U.S. crop now seems a distant pipe dream. At the very least, we all keep wondering when the turn-around is going to take place if ever.

The primary reasons that I can fathom for the weakness in price could include the recent sluggishness in export numbers compared to last year, and the prospect of improved production in foreign countries to somewhat offset the reduced U.S. crop.

We could also be feeling some impact of the loss of Step 2. Hopefully, these lower prices will improve buying and that, in turn, would begin to push prices upward.

For those willing to accept the risk for high prices (willing to speculate that prices will in fact eventually move higher), now would seem an opportune time to purchase call options.

I am cautious on the impact (a really significant impact) of an even smaller U.S. crop. (Editor’s note — The USDA surprised many analysts with its September crop report that estimated a U.S. crop of 20.35 million bales. That was a reduction of only 100,000 bales from the August report when many felt the forecast would be cut to 18.5 million to 19.5 million bales.)

What tends to happen many times is that the impact of a smaller crop is offset by reduced exports and/or larger production in competing countries — and thus the potential fire is snuffed out.

I am reminded of a presentation I heard recently in which the speaker talked of “80-cent cotton” in the future due to population growth and continued increased demand for cotton.

Is this a sustainable price — i.e. would this price result in lower demand? If so, it is not sustainable. In light of the fact that 70 percent of U.S. cotton is now exported, it calls into question exactly what is a “sustainable price.”

World cotton demand has been trending upward for years (this is not a recent factor) and most years’ consumption has been higher than production — yet prices struggle to even hang around the loan rate.

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