College Station, Texas
February 6, 2008
With an uncertain national economy
and volatile equity and commodity markets, the price of cotton
is being influenced by many outside forces, according to a
Texas AgriLife
Extension Service economist.
However, even in uncertain economic times, the outlook appears
to be positive for Texas cotton producers, said Dr. John
Robinson, AgriLife Extension cotton marketing economist.
"If you're growing cotton, you are going to see better prices
than you've seen in the past eight to 10 years," said Robinson,
who spoke recently at the Texas Farm Bureau Leadership
Conference in College Station.
Background considerations include:
- Across-the-board
reductions in cotton plantings in 2007. All U.S. cotton
acres were down some 29 percent with ethanol production
weighing heavily in the shift of planted acres.
- Though West Texas had
record yields and generally good quality cotton, lower
yields and poor quality prevailed elsewhere in the Cotton
Belt.
- Rainy conditions in China
hampered crops in 2007, lowering yields and quality.
These factors, along with “jittery
markets” where money is flowing in and out of agricultural
commodities, tie everything together in the cotton price
scenario, Robinson said.
“The March/May futures trading had prices at 65 to 66 cents, and
the mills bought 500,000 bales of cotton one day,” Robinson
said. “The next day the market went up. Then the mills typically
quit buying and waited for prices to take a dip. A lot of this
is being influenced by the stock market and investment funds,
too. When something causes a pullback, the commodities markets
will react.”
Cotton is competing with other acreage, Robinson said, and
cotton is fundamentally tied to the stock market.
“New towels, drapes, clothes; these are more luxury type goods,”
he said. “If the U.S. economy goes into recession, this can have
ripple effects back through the retail, textile and cotton
supply chain worldwide.”
Another segment to consider is index funds, which buy commodity
futures attempting to mimic the Dow Jones AIG Commodity Index,
Robinson said.
“All they do is buy futures contracts,” he said. “They buy and
hold cotton futures as well as other commodities. Commodity
funds can give as good a return as the stock market, but it's
also very, very risky. This is also why you see cotton prices
moving up or down with grains, metals, oil, etc. These funds are
stepping in and buying shares causing a reaction.”
Traditional hedge funds, on the other hand, will buy or sell
futures according to market trends, he said. Combining both
index and hedge fund transactions result in a “swing with the
wind where you see 3 cents, 4 cents, 5 cents and 6 cents in
change when they are both buying contracts,” Robinson said.
Nearby cotton futures prices are predicted to hold in the mid-60
cent range, though they could continue to rise considering
carryover stocks were at 3.47 percent going into the 2007-2008
year, Robinson said.
“You could see trading of new crop cotton futures reach the low
to mid-80 cent range,” he said.
However, Robinson cautioned producers not to overextend
themselves in purchasing new equipment, land or making other
capital investments if cotton prices continue to rise.
“Remember, this type of market situation isn't going to last,”
he said. “Though you may be in a situation where you see that
prices are high, the cost of production and equipment are
rising, too.”
To view Robinson's weekly cotton marketing newsletter, visit
http://agecon2.tamu.edu/people/faculty/robinson-john/index.html |
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