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United States Of America : Cotton Market Will Remain Volatile : Analysis |
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2003-9-23
Quality and yield losses associated with hurricane Isabel, coupled with mounting concerns surrounding Chinese production, as well as evidence of Chinese buying across numerous growths, pushed the market higher during the last week.
December reached a new life of contract high of 66.80 cents on
Thursday. However, both global supply and demand concerns will keep the market quite volatile for some time. The market should continue to be very volatile until the Chinese and US crops are better defined. Cotton prices will move higher with the 69-70 cent level being the next target.
The price rationing process has not begun. While some mills have
withdrawn from the market, they are banking on the normal ebb and flow of price activity to ease December futures back to 64 cents before looking for pricing opportunities. While I would not be surprised to see mills get their wish, price declines below 65 cents will be short lived.
Additionally, should the market drop below 64 cents, basis December, mill and export business will be expected to rocket skyward, making any sell off very short lived. Price rationing will likely not begin until cotton futures climb above 70 cents. Just as I would not be surprised to see a December sell off below 64 cents, neither would I be surprised to see it trade to 70 cents.
In fact, any additional weather problem around the globe, particularly in China or the United States, will all but guarantee a price move to the 70-cent level. The smaller the world crop gets, the higher prices will move during the harvest season. However, a short crop will not necessarily spell higher prices later in the marketing season. The opposite could well be true.
Rather, we must be prepared to question whether the price high is in for the year. That is, once the crop size is well established, it will require some shock to the demand system to move prices higher. With demand expected to cling close to 100 million bales, it is doubtful that the demand side of the price equation would shock prices higher. The real concern would be that price rationing would limit demand and allow prices to actually ease lower. Thus, marketing considerations should be made for the possibility that the season''s price high could actually occur during the harvest season, thus enhancing the need for cotton growers to
consider the use of cotton options market. Specifically, the purchase of at-the-money, or just out-of-the-money puts would be called for.
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