By Jeff Wilson
CHICAGO (B)--Cotton growers face a tough growing season ahead given the current drought conditions developing across the production belt from Texas to the Southeast. But cotton marketing advisor Joe Bruce, president of Bruce Cotton Co., advised growers to establish a floor under prices now just in case Mother Nature changes course and U.S. producers grow a 20-million-bale crop this year.
Bruce, based in California's San Joaquin Valley, told the Marketing Club Network March 14 they should hedge at least 25% of expected new-crop production and no more than 50% of their crop before the upcoming U.S. Department of Agriculture prospective plantings report on March 31.
He favors using option spreads to establish a minimum price but also to cap potential upside gains. At current prices, Bruce said a grower can buy a 61-cent Dec. put at 300 points and sell a 68 cents Dec. call at 200 points for a net cost of 100 points.
This effectively establishes a 60 cents minimum price floor but also caps potential gains at a 67 cents maximum, basis New York Cotton Exchange Dec. futures. NY Dec. is currently trading near 62.80 cents.
Bruce advised growers not to lose control of their loan deficiency payments or marketing loan payment options. "I would not recommend growers sell their cotton equities or sell the basis," he strongly advised. Opportune timing of collecting those payments has added to much to producers' bottom lines, he emphasized.
Bruce acknowledged the cotton fundamentals have changed dramatically since August, as U.S. production fell 1.35 million bales from the Aug. 12 USDA crop forecast to the March 10 outlook for a crop of 16.95 million.
While domestic consumption has slipped 400,000 bales since USDA's August forecast to the latest forecast of 10.0 million bales, exports remain brisk because of tight high-quality global stocks, rising synthetic fiber costs and a continued rebound in Asian demand.
But the decline in U.S. mill use is not indicative of falling demand, just shifting of domestic operations to overseas mills to lower manufacturing costs. He noted that total cotton consumption in the North American Free Trade Agreement area is actually up slightly.
Bruce noted USDA's export forecast rose 800,000 bales from August to the March 10 forecast of 6.5 million bales.
More important, total U.S. export sales already on the books exceed USDA's forecast by 166,000 bales and need to average just 11,000 bales per week for the next 21 weeks to be comfortable above the current forecast to guarantee all the sales eventually will be shipped overseas.
"Cotton exports could exceed the USDA forecast by a significant amount," he predicted, as Step 2 payments and tight global supplies of high-quality cotton keep U.S. cotton moving into the export pipeline.
Bruce said that farmers need to take advantage of the rally in prices since the December lows. Dec. futures have rallied more than 900 points since the December lows, and the Cotlook A Index is up more than 1,300 points since then, he noted.
"That is a dramatic change in a short period of time," Bruce said. "The rally has sneaked up on a lot of people in the trade," he added about the short-covering activities and active trade buying of any break in prices the past few weeks.
This year is a perfect example of the old trading adage that low prices are the best cure for low prices, Bruce said.
While Bruce remains optimistic that prices will continue to move higher, he said growers need to be scale-up sellers of more new-crop cotton as prices begin to rise above 64.50 cents, basis Dec. futures.
That is because he sees U.S. cotton plantings rising to 15.85 million acres this spring, up 500,000 acres from the National Cotton Council forecast of 15.35 million estimated in February and 14.86 million planted in 1999. More attractive cotton insurance subsidies and the failure of corn, soybeans or rice prices to keep up with the rise in cotton prices since the first of the year are likely to switch thousands of acres into more drought-resistant cotton this spring.
While acknowledging his acreage forecast is just an educated guess, the U.S. still could end up with a total crop that could exceed 20 million bales.
If 15.85 million acres are planted and there is a normal abandonment of 6.75% and yields fall to 646 pounds per acre, the U.S. crop would total 19.89 million bales in 2000. That is well above the 16.95 million bales produced this past season.
He emphasized that his average U.S. yield forecast already was some 35 pounds below normal trendline yields to account for the drought conditions developing across the cotton belt.
"Ending stocks could rise 2.0 million bales next season even if exports expand 1.5 million bales," he noted. "That is substantial downside risk for growers if we produce a near-normal crop," he warned.
December cotton futures could fall into the low- to mid-50-cent per pound range at harvest if timely rains fall this summer. But until more is known about the growing season, he wants to go slow on pushing hedge coverage on the new-crop.
"But planting a crop and growing one are two entirely different situations," he said about any initial negative reaction to a bearish plantings report at the end of the month.
He is looking for prices next spring to be higher than they are now, as the world consumption of cotton continues to rise. He fully expects China to be a net importer of cotton by early 2001, as Chinese production falls below U.S. production for the first time, adding to an improving export market for U.S. cotton.
The real question the cotton market will have to answer during the next six months is how much do foreign cotton plantings change from a year ago. With plantings down some 5.0 million acres this past season and prices on the rise again, the odds of another drop appear to be small.
A rally in Dec. futures above 65 cents could buy more planted acreage in the Southern Hemisphere and the Indian subcontinent, but it is unclear how many, Bruce said.