College Station, Texas, USA
September 6, 2013

There’s more price risk to the downside for cotton farmers as China sits on a stockpile of roughly 40 million bales of cotton, according to a Texas A&M AgriLife Extension Service economist.

Dr. John Robinson, AgriLife Extension cotton economist in College Station, said China’s stockpile was purchased at between $1.30 and $1.40 a pound. That surplus hangs over the market and if they were to decide to sell, the market would experience price shock.


A surplus of China cotton has price risk to the downside for cotton farmers. (Texas A&M AgriLife Extension Service photo by Blair Fannin)

“If they were to dump their cotton, the market might be 30 cents to the downside tomorrow,” Robinson said. “Whenever they decide to sell their cotton, it would overall weaken the market.”

Hedge funds invested in cotton futures are not holding positions for the long term, he said. Instead, any geopolitical unrest could cause a 5-to 10-cent drop in prices, further pressuring any upside potential in pricing.

“I think commercial traders have been expecting lower prices as we go forward,” he said. “It means more surplus cotton for everybody and price weakness.”

Robinson said China may have hoped to see India’s cotton production fall via inadequate monsoon rain. However, that has not happened and has prevented China from selling some of its surplus cotton to India on a price rally.

In the meantime, Robinson advised cotton producers to be aware of price risks and to consider purchasing puts or put spreads. This provides insurance for producers who are holding cotton that hasn’t already been contracted in the event the market was to dip 10 cents or more.

For Texas, Robinson said about half to 60 percent of the crop is in the Plains Cotton Cooperative Association pool.

“They will get their price,” he said. “That’s been the only forward-pricing option available for many growers, especially in dryland areas.”
 

Website: http://agrilife.org/

Published: September 6, 2013