Uncertainty rules cotton market

The fury of Hurricane Katrina's winds, rain, and flooding brought devastation to much of the Gulf Coastal region from New Orleans to Mobile Bay. The storm also may have shaken up the cotton market.

“Anytime there is uncertainty in the market, it affects cotton prices. Hurricane Katrina certainly brought increased uncertainty to the cotton market,” says Bob Goodman, an agricultural economist at Auburn University in Auburn, Ala.

While the region didn't lose the feared million-plus cotton bales the hurricane had the potential to destroy, it did at least temporarily halt barge shipments in and out of the Port of New Orleans.

Exports are a large part of the U.S. cotton market, and one million-plus bales a month must be shipped to keep exports in line with projections. That target becomes more difficult to hit if transportation challenges continue in New Orleans.

“These transportation issues add more uncertainty to the cotton market,” Goodman says. “I think most people have written off the Port of New Orleans, but that may not come to pass. I don't think anyone knows what will happen, because we are in uncharted territory. How much this ultimately affects the cotton market depends a great deal on what the situation is in a month.”

Goodman, and a group of Extension specialists and researchers, flew Sept. 7 to Mobile, Ala., to inspect Alabama's southern-most cotton producing region. “We toured extensively in cotton, and what we saw was a lot of damage. The damage was especially significant on the west side of Alabama from the coastal region all the way north to the Tennessee River. The cotton crop is anywhere from totally destroyed to damaged severely with much of the stalks twisted, the cotton generally beat up, and the fruit damaged. West Alabama's cotton producers will likely see decreased quality and high micronaire,” he says.

Hurricane Katrina didn't deliver the knock-out blow that it could have to Alabama's cotton crop, but Goodman says there was a lot of cotton lost to the storm. He doesn't think the United States has experienced a significant cotton supply loss, but he says it is too early to tell. Also a factor are decreased cotton production estimates in Thailand.

The cotton market, he says, is adapting to the changes.

Before the storm, Goodman was taking a wait and see attitude toward price projections. “I thought the futures market, with December cotton down in the upper to mid-40s, was slightly below what it should have been. I thought the supply and demand situation better reflected a price somewhere in the 50s,” he says.

A rally following the hurricane's demise put cotton prices above 50 cents per pound. However, the difference between the high and the low in the daily trading during the week of Sept. 9 was well over 100 points. Historically, that's a substantial amount of volatility in the cotton market, according to Goodman.

“Cotton growers may want to lock in some cotton during this rally. There continues to be potential, once this transportation and marketing situation is straightened out, for some downward pressure on the price of cotton,” he says. “Because there is no clear indication on which way the market will go, and considering the yields projected for this year's cotton crop, most producers will have enough cotton to pay the bills if they sell at 52 cents and take the LDP.”

He adds, “It's more important than ever to have a plan and stick to it, because you just never know what price and production-related changes you'll be faced with from year to year.”

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