Cotton market: “Fish or cut bait” decision

Cotton market: “Fish or cut bait” decision

In the Southeast, the “total money” for good quality 31-3/35 cotton is currently about 73 cents including the Marketing Loan Gain.

Since the first of the year, we’ve seen 3 “bottoms” in the cotton market. Each has been at a progressively higher price. That’s an encouraging sign. Each recovery, at least to date, has still been unable to break through the ceiling at 66 to 67 cents. July is currently testing this ceiling for the third time.

For producers still holding a portion, or all, of last year’s crop, so far it’s been a mostly unrewarding ride. Prices are a few cents higher but essentially at the same level they were in October and early November. Merchants are now buying the crop basis the July futures contract. July is at roughly 66 cents and change.

New crop Dec15 futures are currently also around 65 to 66 cents. There has been little if any incentive for producers to do much of anything with regard to pricing this year’s crop and I doubt much has been done. Prices have been stuck in a 5-cent band between 62 and 67 cents. Should economics ever dictate that we pull out of this rut, the target/objective would likely be the 70-cent area.

The Seasonal Drought Outlook (for the period through July) calls for drought conditions to lessen in some parts of Texas including portions of the panhandle. Drought conditions are also expected to improve in southeast Alabama. The drought will continue in California and parts of Arizona and New Mexico.

Analysis and outlook

Time is running out for old-crop. Exports have been very good and the Basis and demand for good quality. A very strong export report last week is, in part, reason for the present “surge”. I continue to believe that any remaining 2014 crop, or at least portions of it, should be sold on rallies to this 66-67-cent area. There continues to be talk of prices eventually moving to challenge the 70-cent area. Is this possible? Yes. But I don’t know that I’d risk a large portion of my crop on that.

In the Southeast, the “total money” for good quality 31-3/35 cotton is currently about 73 cents including the Marketing Loan Gain (MLG). The MLG is currently 3.44 cents through the close of business this Thursday. The rally in the market in recent days is a good opportunity to increase your “total money”. The MLG will go down next week unless prices falter the remainder of the week.

Some producers took the POP/LDP last fall and have been storing some, most or all their cotton. These rallies are good opportunities to begin to sell off that cotton.

Nowhere market

For the 2015 crop, the market has gone nowhere. The 5-cent band of mostly 62 to 67 cents seems rather firmly entrenched for now. I think 70 cents is the point where we have to make our first “fish or cut bait” decision. The chances of getting there are uncertain.

Weather factors could come into play and drive us there but the drought outlook looks to be improving. Prices could still move, however, based on production in other countries, continued short supply of and demand for high quality, and other factors.

Other than sit and wait it out, other strategies could include purchase of Dec Put Options at the 66 to 67 cent level and/or purchase of March Call Options at the 63 to 64 cent area.

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