September Will Determine Direction of Cotton Market.

USDA's August report estimated the 1999 US cotton crop at 18.3 million bales. This was 500,000 to 700,000 bales less than most industry pre-report guess-timates. Potentially, the crop may get even smaller. USDA's report was based on conditions as of August 1. The conditions and yield potential of the crop appear to have declined further since then.

The August number caught the market by surprise and since that time prices (December futures) seem to be willing to hold above the loan rate (52 cents per pound). News on the demand side has not been particularly favorable. Renewed funding of Step 2 is expected and the market has likely already factored that in. USDA also shows exports in '99/00 at 5.7 million bales-- 1.5 million above last season. Price seems to be keyed on the supply side right now.

September may well be a pivotal month. The August report was likely enough of a shock to hold prices up for the time being. If USDA's September report again confirms a crop of 18.3 million bales or less, we may see further strength in price. Prices will likely stall in the 56-58 cents area, however, and the longer term direction may still be down if export business is weak.

There are many sources of risk in marketing the '99 crop. At this point in time, probably the best approach and a good balance of price and risk management would be to contract what can be delivered at 2-3 cents above the loan rate if the opportunity comes along (this would mean 56-57 cents on December futures). This would lock in a floor of 54-55 cents. Then POP the cotton after delivery and before beneficial interest is lost. Then take the 2-3 cents above the loan rate and invest it by buying a Call Option.

If this opportunity doesn't present itself, plan on (a) POPing the cotton, selling it at harvest, and buying the Call or (b) placing cotton in loan. From the loan, you can later redeem it and get a marketing loan gain or you can sell equity to a buyer. (Don Shurley)

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