Uncertainties as to the direction of the new farm bill and other variables make it unwise to price new crop cotton at this point, Memphis merchant William Dunavant said at the Beltwide Cotton Conferences in Atlanta.
“I do not want a position, because too much can happen,” said the chief executive officer of Dunavant Enterprises Inc. “Fundamentally, for new crop cotton, 43.75 cents is too high, taking into account supply and demand. It's too early to make a determination, especially since we don't have a farm bill.
“If a grower must make a move now, selling equities for new crop is the right move, because we're again looking at a potential over-supply for next season. We don't even know the loan level, since we don't have a farm bill in place. We don't know conclusively if the new farm bill will affect next year's loan level, or the succeeding five years.”
Options, while they may seem expensive, Dunavant said, can be used to protect upside and downside risk for the new crop, and will have value for six to eight months.
For the current crop, he said, “I would like to be long between 33 cents and 35 cents and short above 40 cents, because at that level you run into a volume of cotton that is available for sale. At that level, the producer can receive a small equity.”
Dunavant said he expects the market will continue to be in a trading range for the current crop, “and I strongly believe we've seen the lows for this marketing year.” He looks for the March contract to be in a trading range of 34 cents to 40 cents. “Today, we're at the upper end of that range.”
Sell for equity
With a U.S. carryover of 8.7 million bales, “I strongly believe U.S. cotton producers should sell when they can receive an equity of any amount. There is still a volume of cotton in the marketplace that has been POP'd and is not eligible for the loan and will have to be sold in the next few months.
“As we enter the spring, if there is a major problem with planting the new crop, prices may rally in late spring and pull old crop prices higher. But we still have an excessive carryover for this season.”
On the flip side for prices, Dunavant said, “If some competing countries wake up in May and find out there is no demand for their cotton because the U.S. has taken their markets, then world prices could nosedive as those countries struggle to sell their cotton rather than carry it to the new crop.
“There is certainly nothing bullish for prices in the U.S. and world, but I would suggest we all be cautious because cotton prices are at historically low levels.”
With 3.9 million bales in the loan, he said, “I believe a substantial amount of that cotton will die in the loan this season and the government will catalog it and sell it during the next crop year, which could put pressure on new crop prices if we produce a projected 18 million bales next season.”
With the new December contract trading at 43.75 at the time of his address, Dunavant said that looking only at supply and demand numbers that price would seem too high, but “I would not recommend to a grower to sell his new crop cotton at least until we have a new farm bill and get through planting time.
“I think the farm program itself gives you enough protection that you don't have to risk selling at cheap prices. We have no idea what the loan deficiency payment will be for next season. Remember: At one point this season the POP was 31.02 cents and today it is 22.80 cents because of the strength in world prices.”