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Sharon Johnson: Season vs. historical cotton market
The 1275 pt rally in the past 3 ½ weeks by December 2010 contract and how high it is on a flat price basis this summer have prompted comparisons with this year versus 1995 and 2003. Although there are similarities, there are also huge differences.
I have even heard mention of 2008 as a year to be compared with nearby cotton. This comparison is due to it running up to 91.38 cents, due more to funds moving into commodities in a huge fashion, and structural problems related to the margining method used by the exchange, as well as no vehicle in place to allow for lock-limit moves.
Fundamentals in the 2007/2008 crop were very bearish here and on a world basis and a price advancement of that size in such a short period of time is unlikely to occur again, given changes made by the exchange with margins and price limits as well as the smaller speculative participation.
As for 1995/96, the market had just gone through a similar lack of available cotton in late spring/summer. The only other year when the A index was withdrawn due to lack of quotes. The December 1995 contract hit a high of 84.00 on Jun 8, 1995 in sympathy with old crop, dropped to a low of 71.00 on Aug 1, 1995 due to pre-harvest pressure and then rallied to 94.65 by Sept 22, 1995. The rally of 23 cents in less than two months occurred due to a huge problem with insects that summer/fall dropping the US yield and production from an estimated of 665 lbs/ac and 21.5 mln bales in NASS August 1995 report to a final 537 lbs/ac and 17.9 mln bales which in turn pulled US ending stocks down to 2.6 mln bales. However, prices from Sept 1995 with the Dec contract and with subsequent contracts gave back the strong values with the Jul 1996 contract eventually falling to a low of 69.00 on June 25, 1996 into its notice period.
Interestingly, a similar performance occurred with prices in the 2003/04 crop year with the December 2003 hitting a summer high of 63.10 on Jul 8, 2003 and then falling to a pre-harvest low of 55.60 on Aug 18 2003. However, by Oct 30, 2003, the December had rallied to 84.80 (29 cent gain). But, subsequent contracts worked lower over the next 9 months, with the Jul 2004 contract trading at 47.00 on June 23, 2004 just prior to its delivery period. For those of you not familiar with the fundamentals of 2003/04, China’s cotton crop suffered from heavy rains during harvest, resulting in panicked-type buying by the Chinese of 4 mln bales from the US and World to supplement their short crop during Sept/Oct 2003.
As for the Dec 2010 contract, it traded as high as 79.90 on June 16 in sympathy with old crop due to strong cash prices and then dropped to a low of 72.96 on Jul 20 and has a current high of 85.71 (1275 pts gain) as of Aug 13. Harvest problems in a major producing country is the primary culprit with the 1995 and 2003 rallies in the summer/fall timeframe and in 2010, heavy rains/flooding in Pakistan explain part of the current rally. Of course there are also differences such as in 1995, the production issue was in the US as foreign production and stocks grew. In 2003, the US enjoyed a record yield producing an average crop from lower area but demand hit a new record drawing stocks down with modest improvement in the foreign/world production and carryout. This year, both the US and World cotton crops are up substantially but consumption per the USDA (thus far) is forecast to recover even more keeping ending stocks projected at low if not very low levels.
As to the next 11 months of 2010/11 crop year, prices could move higher if the crop losses in Pakistan are much worse than the newly revised USDA figure, problems develop elsewhere with the world cotton crop over the next few weeks, India’s import policy is not as liberal as wanted/needed by foreign mills, China grants additional import quotas above and beyond that to date taking effect shortly, recent economic news proves to be a fluke and back-to-school sales are super boding well for the holiday season, etc. However, If nothing untoward occurs the remainder of this month and September, harvest pressure will build allowing a gradual, albeit limited, sell-off over the next few months before tightness exerts itself into the second half of the season. By late spring 2011, I suspect practically every mill will have sufficient quantities of cotton bought to avoid a repeat of this past spring/summer when some could not find cotton at any price. In addition, global cotton area should respond accordingly given prices during the 2010 calendar year and that of Dec 2011 with at least a modest increase.
The range of seasonal high to seasonal low from Aug 1 forward may be limited, since futures are as high as they are currently but any sell-off should be well supported. If consumption falters over time, as I expect, futures could begin to back off sometime late spring/early summer of 2011.
Despite tight stocks in the US, merchants need carry in the market and cert stocks should show some improvement with the March 2011 contract, which in turn could be maintained with the May and Jul contracts. Though again, they may be taken off the board by next summer. The Oct 2010 contract traded as high as 89.17 Fri, Aug. 13. which for our purposes may prove to be the seasonal high or at least an objective for subsequent contracts. A low in the mid-70’s is reasonable to for the March at the moment but predicting a low with the Dec depends on what unfolds the next few weeks.
Sharon C Johnson, @Copyright 2010
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