Cotton prices crash


Cotton prices (Dec13 futures) have crashed right through what used to be strong support at the 82-cent level. It’s been a horrible last 2 weeks. Dec13 cotton prices have closed lower for 11 straight trading days dating back to Oct. 18, losing more than 7 cents per pound in the process.

Cotton prices broke below the 82-cent support level Oct. 23 and it’s been a train wreck ever since. December cotton prices now are at 76.58 cents per pound.

Why the crash? Most reports seem to lay the blame on heavy speculative long liquidation. I’ll admit I’m not 100 percent sure what all that could mean, but generally it could be speculative funds that bought cotton futures sometime earlier and are now “cashing in,” or selling to take profit and/or prevent further losses.

Other possible factors sighted include:

  • Prospects for a record crop in India. Sources peg the India crop at 29.3 million bales—actually just slightly above USDA’s September estimate of 29 million bales.
  • Weak U.S. export sales. In the past, low prices have resulted in increased buying. Export data has sometimes been more positive but overshadowed by other negativity in the market.
  • Improvement in U.S. crop condition and harvest — although data doesn’t really support this. For the week ending Oct. 27, the U.S. crop was 24 percent poor or very poor compared to 22 percent as of Oct. 20. The Texas crop was 35 percent poor or very poor on Oct. 27 compared to 30 percent on Oct. 20.
  • The lack of news due to the U.S. government shutdown may have caused traders to become nervous and they decided to bail out to reduce further uncertainty.

It is generally believed that yields are coming in better than expected. This may be reflected in next week’s USDA production and supply/demand numbers on Nov. 8.

One trader was quoted as saying “There’s just too much cotton in the world”. Really? This is hardly a news flash. The World stocks situation is certainly a factor but most stocks are in China and yet still “unavailable” for the market.

Yields may improve from the September estimate but it is worth noting that cotton harvest continues to run behind normal. Physiologically, development is about normal: 92 percent bolls open on October 27 compared to 94 percent normal.

So, yield potential is pretty much done but getting the crop out of the field is late. As of Oct. 27, the crop was only 34 percent harvested compared to 44 percent normal. This could still negatively impact U.S. yield.

The last two weeks have been rough going. There is some belief that prices have over-corrected (are oversold) and that some recovery is due.

Producers looking for additional marketing opportunities could use the Loan, sell and purchase May or July Call Options or store and sell later.