DECEMBER 2011 COTTON VS HISTORY
Atlanta, Ga – The Dec 2011 contract traded as high as 77.99 Fri, Aug 13 and 77.80 on Mon, Aug 23 but has been as high as 81.00 earlier this summer. Open interest (the number of outstanding contracts) is quite low at 2,960 but larger than just a few weeks ago when its seasonal high was made. Although many producers, merchants and analysts for that matter are engrossed with the current crop, we must be attentive to next year’s prices. As satisfying as these high prices are with the nearby December, the likelihood of equally high prices with the next crop year is far from assured especially if consumption falters (as I expect) and cotton area rises again which is likely based on current high prices. In addition, the upcoming 2012 farm bill may strip key portions of the cotton program. Dr Mark Lange spoke at the South Cotton Ginners Summer Meeting in Memphis recently. He indicated the size of the national deficit, preference for crop insurance by key congressional members at the expense of direct payments or price support system and the trade case involving Brazil could also work against retaining the cotton program as we know it. The 2011/12 crop year will be last year before the next farm bill takes effect allowing producers one more year to hone their marketing skills with the current provisions. In addition, as improbable as it may seem now, two years of high prices may be sufficient for cotton production to overtake consumption by the fall of 2011 resulting in a much larger range of seasonal high to seasonal low.
In his weekly report dated Fri, Aug 13, Dr John Robinson with Texas A&M discussed this very topic and had a very useful chart showing the seasonal high and low of the December contract the past 25 years with a 10-year average ban of highs and lows. Dr Robinson points out “the current nickel-plus inversion, (Dec 2010 is 5 + cents above Dec 2011) could be a signal that the market expects lower prices from a "supply response". That is, the high prices over 2009 and 2010 have led to increased plantings, and ultimately will stimulate greater quantities supplied and lower quantities demanded until cotton prices return to "normal". You can find Dr Robinson’s entire report including his discussion of December 2011cotton contract at