Crop Size and Exports Both Important to Post-Harvest Prices For Cotton. (Don Shurley, October 28, 1997) In October, USDA estimated the 1997 U.S. cotton crop at 18.4 million bales. This was essentially unchanged from the September forecast. A deteriorating crop in the Southeast was equally offset by improvements in the Mid-South. The November report will likely reduce the '97 crop to 18.2 million bales or less.
 

Cotton prices are currently going through the normal seasonal lows of harvest-time. Improvements in the condition of the crop during August and September, subsequent lack of any downward adjustment in crop size, and lower export prospects have fueled the drop in prices during October.
 

The recent drop in price is concerning to many growers because (1) they may be "underpriced" on their production and (2) it causes serious questions about a potential recovery sufficient to make storage (or use of Call Options) profitable. Further, grades on the '97 Georgia crop have been well below average and both cash and contract prices will be discounted.
 

Despite the current situation, the market is far from settled on two important issues: crop size (and quality) and exports. Although USDA has held the crop at 18.4 million bales (which by any observation is an adequate supply) the quality of this year's crop could become a factor. To date, 58 percent of the Georgia crop, for example, is below base color grade. Color grades have been much better in the Mid-South but again this year, this region is running higher than normal in micronaire readings. At some locations, 12-15 percent or more of the crop is above the base micronaire range.
 

USDA, in it's October report, lowered projected '97 crop exports from 7.2 to 6.9 million bales. This was based on earlier suggestions of improving crop prospects in China, India, and Brazil. Weekly export numbers (of old crop cotton) and new crop purchases continue to be impressive, however. This could be a double-edged sword. Unless the strong pace is continued, a side-ways market could develop into the winter months. The recent sell-off in Southeast Asian currencies could also weaken export potential to these important U.S. markets.
 

The market is expected to recover from the harvest-time doldrums but recovery could be slow. At present, a move in May-July futures back to the 77-cent area is a target for any recovery. Because the market may be sluggish and slow to recover, producers should carefully evaluate storage and Call Option decisions. Purchase of an at-the-money Call for the equivalent of not more than 3 months storage and interest costs (about 2 ½ to 3 cents per lb) would be the least risky strategy. A disadvantage would be that the grower is giving up any potential basis gain.
 

Growers with below base grade cotton may, if having the option, want to still deliver the base grade or better against a forward contract. The contract price is probably high relative to the current and near future market thus you'll want to capture that price. The cash market often does not discount below grade cotton as much as the government differences on contracts. Thus, selling this cotton on the cash market would result in a higher net price.

Back to Cotton Outlook