Extension expert advises cotton producers to follow fundamentals
Cotton producers are advised to stick to fundamentals when looking ahead to future prices, according to a Texas A&M AgriLife Extension Service cotton economist.
John Robinson, College Station, said on the recent Ag Market monthly conference call that despite recent news headlines, the fundamentals of supply and demand is a good compass for forecasting future prices.
“I expect this year’s December and next year’s (December 2014) harvest time futures contracts to continue to trade in their current ranges,” Robinson said. “I want to point out the current spread of December 2014 is about a nickel below December 2013, which implies there is already an expectation of a Chinese unwinding some of their stocks.”
Robinson said the absence of (daily, weekly and monthly) U.S. Department of Agriculture market information during the government shutdown “was like a metaphor for what’s been going on for a couple of years.”
“Namely, fundamental information is subordinate to policy interventions (with Chinese stockpiling being the continuing main intervention),” he said. “A projection of upper-70-cent futures for December 2014 cotton means growers first need to question whether that is an affordable enough price to plant cotton.”
Robinson said cotton farmers who do decide to plant cotton need to think about forward pricing or hedging because the risk will continue to be to the downside.
“Puts and put spreads on December 2014 cotton futures are amazingly cheap, considering how far away we are from December 2014,” he said. “It’s an affordable insurance opportunity for those already planning on planting cotton.”