Too much cotton. How much lower can prices go?

USDA (in it's October report) again pegged the 2001 US crop at 20 million bales- about 3 million above last year. The World crop is expected to be almost 8 million bales above last year. By most accounts, demand is doing well (92.1 million bales worldwide-- a record level if achieved) but not good enough to avoid a buildup of stocks both in the US a abroad.

US export sales are doing very well and total commitments or forward sales for the 2001 crop year are already at about 7 million bales. USDA projects exports will be 9 million bales. This is a very good level of exports by any historical standard but the US mill industry has declined tremendously. Given the 20 million bale crop this year, it would take 10-11 million bales in exports to get us back to price levels that farmers would like to see.

So where does that leave us in terms of the outlook and marketing plans? Currently, the LDP is more than the cash price of cotton. Total money (LDP plus cash sale) to the producer for base quality cotton is about 56 cents. Any other strategy can be compared to this money.

Granted, the outlook is bleak. If the market were to mount a rally, the 40-44 cent level would probably be the top given what we know at this point. Unlike last year when prices fell out of bed after the first of the year, we are currently already at the lowest levels since the early 1970's. So, the outlook must be up- right? Who knows but the odds would seem to suggest so.

It may be worth holding on to some of the crop in some fashion but we need to be very careful about how we do it and realize that we're not thinking in terms of a huge rally anyway. Perhaps the best strategies would be to take the 56 cents and run, or put the cotton under loan, or take the 56 cents and use 3 cents of it to purchase a Call Option.

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