The cotton market continues to show weakness as prices now appear willing to test lows not seen since October of 1994. Cotton buyers are now working off the March futures and prices for base quality SLM 41/34-4 are currently running about 225 points under March. With March now in the 67 cent area, Georgia cash prices are now just under 65 cents per pound. If you have a good number of light-spotted bales, you're easily 3-5 cents under this.

In USDA's latest production and supply/demand estimates released on December 11th, about the only good thing that can be said is that the size of the US crop was not increased. Some analysts thought that it might be and surely that would have been perhaps the fatal blow to an already sick and ailing market. USDA kept mill consumption at 11.4 million bales but increased expected exports to 7.1 million-- up 100,000 bales from last month.

The function of price is to ration supply to meet demand and still have reasonable carryover or inventory. If supply is adequate or more than adequate, prices will decline or at best stabilize. If supply is small, prices must increase. Currently, it is estimated that carryover stocks will be 4.3 million bales or 23% of total use. While not a large amount, this is still a reasonably comfortable level. Thus, there appears little reason for the market to get excited.

Looking at the global picture, world production is expected to be about 1 million bales above last year. Cotton use, however, is expected to be up 1.3 million bales. World stocks are expected to be only about 2% higher than last year-- not a significant increase. Of concern, however, is that in it's December report, USDA projected world consumption 200,000 bales less than in November and world stocks 600,000 bales higher than in November.

After all is looked at, the world situation appears not much different than last year. And the fundamental economic facts are that US mill use and exports numbers remain encouraging. The market, however, seems to be concentrating on the southeast Asian economy and factoring in the uncertainty of that situation into today's prices. Add to that speculative interest that seem bent on driving prices down to the next level. I agree with other analysts that the market most surely must be at or near the lows and that prices will shortly begin a recovery.

The recovery is likely to be slow, however. Storing cotton profitability will, therefore, be more difficult. Unless the market is able to break through the sideways funk it's been in July '96, a target for July futures would be the 74 to 75-cent area-- or 4 to 5 cents above it's current level. Such an improvement (IF it were to occur) could mean an 8 to 9-cent improvement in cash prices from the current level (3 cents "spread" between March and July + 4 cents futures gain + a 1 cent improvement (?) in the basis). If the current spread does not hold or narrows (as it did between the December and March futures) the gain in cash prices would be less-- perhaps only 5 to 6 cents and this depends on change in the basis.

Using commercial storage, it costs about 90 points per month combined storage and interest charges to hold cotton. If the market does not show improvement until April-May or later, 5 months storage will cost 450 points. An "at-the-money" July Call Option is significantly cheaper at less than 300 points. Clearly, this is the cheaper way to hold cotton although some of the savings is offset by giving up any potential basis gain from holding physical cotton.

Don Shurley

Professor and Economist-- Cotton and Peanuts

912-386-3512

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