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‘Sideways prices’ predicted for cotton in 2009

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College Station, Texas
December 22, 2008

The current economic crisis coupled with decreased demand won’t spark any immediate rally for cotton prices heading into 2009, according to a Texas AgriLife Extension Service economist.

"There are a couple of things that suggest cotton prices are going to be sideways and struggle to go higher,” said Dr. John Robinson, cotton marketing economist. “Corn will likely go a bit higher since the last two years there’s been this battle for acreage. Cotton has taken a cut in acres because prices didn’t get high enough and that was predictable. Net returns suggested people were better off planting more soybeans, wheat, etc. Cotton is much worse off now.”

Just six months ago, cotton prices were at 80 cents a pound, but now have fallen in the mid 40s. And large U.S. carryover stocks continue to loom, with ending stocks for 2008-2009 increased 900,000 bales, totaling 7.1 million bales.

“U.S. new-crop cotton is currently all going into the loan program, which has also been the case in four out of the last five years,” Robinson said. “U.S. cotton sits in there, while the Chinese uses their cotton, then Indian cotton and all of these other countries that don’t have a loan program, they can get rid of it.”

When those countries do buy U.S. cotton, typically during the May-July period, traditionally it sparks a minor upward trend in price, Robinson said. He predicts it will be June before there might be some positive trends affecting cotton prices.

"We’re not really out of this financial crisis panic-mode yet,” he said. “Real estate prices are not through unwinding and we’ve got a new administration that will be settling in. It will take quite a few months for normalcy to return. Cotton is going to continue to suffer because people are watching their spending and not buying clothes and automobiles, in which cotton is used for the interiors.”

These factors will likely lead to ‘sideways prices’ and if cotton does rise in price, “it won’t rise enough to compete with corn or soybeans,” Robinson said. He also predicts a cut in Texas cotton acreage due to competing crops such as wheat, corn and soybeans receiving more favorable prices.

Input prices continue to be high due to expensive seed and chemicals. One bright spot is the recent decline in fuel prices. If fertilizer does become cheaper, Robinson predicts more farmers will increase corn plantings over cotton, particularly in the eastern cotton belt.

To beat the current market, Robinson has some advice for cotton farmers: Stick to a sound marketing plan to avoid price risk. That can include a combination of elements.

“Basic tactics like forward contracting, selling at harvest, marketing pools, or USDA loan program are things to be looking at,” he said. “Hedging with futures and options can complement or substitute for these basic tactics.”
Robinson also encourages producers to think about taking loan deficiency payments now, marketing their cotton and buying “cheap call options as insurance against missing out on higher prices in 2009.

"By selling now, collecting a loan deficiency payment and buying a call, you are only left having to watch the New York Futures Market.”

For more on cotton markets and marketing strategies, view Robinson’s weekly newsletter at http://agecon2.tamu.edu/people/faculty/robinson-john/index.html.

 

 

 

 

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