What a year! Cotton has had quite a ride so far, and the 2010 crop is not yet even picked and in the warehouse. Prices have already risen to unforeseen levels, and it seems to be anybody’s guess as to what can happen the remainder of the marketing year.
I write a newsletter, Cotton Marketing News, bi-weekly for Southern Cotton Growers Incorporated. It is easy, therefore, for me to look back over the year and chronicle where we’ve been, where we thought we were going, and why or why not. It’s years like this one that reinforce the notion that although no one really knows with 100 percent certainty what will happen in the future – there is still benefit to be gained from careful planning, gathering of information and data needed, and then making the best/most informed decision possible. Sometimes good things happen – just falling into our lap, and we should be thankful for that. But more often than not, good things are the result of well thought out decisions.
During the winter and spring, the top of this market was thought to be around 75 to 80 cents. In February, the market (Dec. ‘10 futures) had dipped to 70 cents. Prices during March and April then made a run to the 75-cent area. If not earlier, this was probably the point where many producers made their first stab at pricing. Good/reasonable decision. We didn’t yet know what final acreage would be much less demand prospects and growing conditions but based on historical prices, 75 cents or so seemed pretty odds-on favorable.
From April through June, prices moved through 75 cents to almost 80 cents. Prices dipped sharply in early June but then very quickly recovered to the 80-cent area. This trend to around 80 cents likely prompted more pricing. Again, a reasonable decision. In July, prices faltered to around 74 cents and could have brought on panic pricing by those not having done much thus far. On the other hand, producers with a moderate portion of their crops already priced earlier were happy they did.
When prices dropped back down below the 75-cent area in July, that seemed to validate the belief that 75 to 80 was the top. What transpired next, however, was completely unexpected. A continuous chain of bullish news drove prices to more than $1.
After reaching about $1.05, prices suddenly dipped back to around 97 cents, and this led us to believe that the run had finally broken. Instead, prices surged right back, and this time to around $1.10. Unbelievable.
Looking back on cotton’s price run this year and looking ahead to next year, what do we need to glean from all this, and what are the implications? No one has a monopoly on knowledge, and we all look at things from a slightly different perspective, but the following are a few thoughts on what we can take away from what has transpired.
What Does It Mean?
Many things impact price, not just supply and demand. Technical and speculative traders as well as investors can drive prices beyond levels thought justified by economic supply and demand. On the upside, this can create great price opportunities for producers. A good portion of the run to $1 cotton has much to do with “other” factors as it did supply and demand.
The value of the dollar relative to other currencies is also important. Even if the U.S. price of cotton goes up, a weak dollar can soften the impact on foreign buyers.
Electronic trading can result in quick price swings that are difficult for the producer/hedger to react to in a timely manner. Prices can be very, very volatile. All commodities, not just cotton, are influenced by factors on the other side of the world and prices impacted almost immediately. Because of increased price volatility, it would be beneficial if marketing were more flexible. What I mean is that contracting at a fixed price, while locking a floor, doesn’t offer much flexibility. If prices go up after you contract, you’re not happy. Options can’t guarantee the best outcome but they do provide flexibility. I’m not advocating options, but I am saying that somehow marketing plans have got to be more flexible.
Cotton over 80 cents is attractive by any historical measure. Cotton acreage will increase in 2011, but because stocks are expected to remain tight, prices could nevertheless make another run if demand is strong and if crop problems develop.
This again points out the very real advantage of flexibility in marketing.
Need More Information?
Don Shurley is professor and crop economist with the University of Georgia. He can be reached via email at firstname.lastname@example.org or by phone at (229) 386-3512. Additional cotton information can be accessed at www.ugacotton.com or www.agecon.uga.edu.