Why Cotton Prices Will Fray
Commodities Corner
| SATURDAY, MARCH 8, 2014Why Cotton Prices Will Fray
Cotton prices have been trading at six-month highs, but prices may pull back toward the end of the year as U.S. growers harvest a much larger crop.
Cotton prices have been trading at six-month highs, but analysts expect them to pull back toward the end of the year as U.S. growers harvest a much larger crop.
U.S. farmers are expected to plant more cotton this spring than last year and reap a crop almost a quarter larger than the previous harvest, according to a survey released in February by the National Cotton Council. That means the cotton contract for delivery in December, the first to correspond with the new crop year, will be under more pressure than those in the coming months, which include March, May, and July. Those contracts are being buoyed by concerns about tight supplies ahead of the harvest later this year.
Recently, the December contract was trading at a 11.5-cent discount to the front month, the contract month with an expiration date closest to the current date, which settled at 91.02 cents a pound on Friday. The last time the price gap between the two contracts was that wide was in July 2011.
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The U.S. Department of Agriculture is projecting three million bales of cotton will be left over in domestic warehouses at the end of the current season on July 31, the smallest in four years. Three million bales "is tight but doable," says Louis Rose, founder and owner of Risk Analytics, a cotton-consulting firm in Memphis. "When you drop below that, the market starts to get dicey."
But the additional supply from the next harvest, coupled with weaker demand from No. 1 cotton consumer and importer China in the new season, could be a recipe for lower prices, traders and analysts said. China quintupled the size of its cotton stockpile over the past two years to ensure a steady supply to its mills. But the government is now shifting from stockpiling the fiber to paying farmers directly to encourage production.
That means Chinese-grown cotton could become more readily available and accessible to mills, reducing the need for imports from the U.S. and other growers of the fiber. In January, China's cotton imports were down 36% from a year earlier, according to Chinese customs data. "We have the Great Wall of lint, which is the first problem" for higher prices, says Sterling Smith, a futures specialist at Citigroup in Chicago. "This market has been incredibly dependent on good export sales."
U.S. GROWERS ARE EXPECTED to harvest about 16.4 million bales of cotton in the coming season, according to the NCC. One bale of cotton weighs about 500 pounds. Traders and analysts say the final figure depends largely on the weather. The National Oceanic and Atmospheric Administration says the El Niño weather phenomenon is possible this summer. El Niño is a band of warm Pacific Ocean surface temperatures that can cause climate changes.
El Niño could be a boon for Texas, the top U.S. cotton-producing state, which has been suffering from drought conditions since 2010. During El Niño, rains in Texas have historically been above average, according to NOAA. Increased rains could help the growth of the cotton crop.
To be sure, betting on the weather is always a risky endeavor, and if rains fall hard after the fluffy cotton bolls open, that could damage the crop. "It couldn't be any further away from a done deal," says Sharon Johnson, introducing broker at KCG Futures in Atlanta
