Perhaps Mike Stevens, with Swiss Financial Services, in Mandeville, La., characterized it best when he called the bull in the current cotton market, “a 9-headed hydra. Whenever you cut off one head, two more appear in its place.”

That’s an apt description, considering that cotton prices have reached nearly mythological proportions lately. December 2010 futures spiked to $1.51 a pound on Nov. 9 before profit-taking took them back into the mid-$1.40s by Nov. 11.

Impressive, but U.S. cotton prices still have a ways to go before achieving the price levels seen in China in 2010. They’ve reached well over $2 a pound, according to Stevens.

Stevens and other analysts speaking at the Ag Market Network’s November teleconference say current and future cotton prices begin and end in China. For example, the news behind U.S. futures surging to over $1.50 came on USDA’s lowering of estimated Chinese beginning stocks for 2011 by 3 million bales from the previous month.

This is a big reason why USDA dropped world ending stocks to 42 million bales, a 36 percent stocks-to-use ratio, “which is low by any historical standard,” according to John Robinson, Extension economist, Texas A&M University.

The bulls are on the loose in the United States too, according to Robinson, where USDA cut projected U.S. production by 450,000 bales “primarily due to lower production in the Southern High Plains and the two Rolling Plains reporting districts.”

Forecast U.S. ending stocks declined 500,000 bales, “which is quite an adjustment this time of the year,” Robinson said. “It takes us down to 2.2 bales of ending stocks, which is the lowest ending stocks we’ve had in 85 years. Just like in the world situation, it provides rationale for continued price strength.”

China: lead bull

Gary Adams, vice president of economics and policy analysis, National Cotton Council, said China continues to be the lead bull in the price charge. “While China is the largest producer, largest processor and largest importer of cotton in the world, they are also the biggest area of uncertainty. We don’t have a good handle on exactly what the stocks situation is in China. It’s got to be a very tight situation.

“What we do know is that over the last 15 months, China has been aggressively auctioning cotton from its state reserves, somewhere around 16 million bales. You have to think this has brought stock levels down tremendously.”

Adams noted that USDA’s significant reduction in projected mill use in China is an indication that high prices are starting to affect demand. “The numbers we hear certainly suggest that mill use is slowing. That’s one thing we really need to watch. If cotton prices are higher relative to polyester prices, can we sustain demand at this level?”

Export restrictions by India are also fueling higher prices, according to Adams. “This is also adding to the price levels we’re seeing and to uncertainty in the market as well. There is some thought in the trade that the India crop is slightly larger than the 26 million bales the USDA is currently estimated.”

Meanwhile, Pakistan’s cotton crop “is not as large as originally stated due to effects from flooding,” Adams said.

It all makes for a bullish environment, according to Adams. “It’s also part of the reason why we’re seeing U.S. export commitments and shipments through October just shy of 12 million bales, a level that is unheard of for this early in the marketing year. The highest we’ve been in the past is roughly 8 million bales.”

Carl Anderson, professor emeritus, Texas A&M University, says there continues to be a wide gap between foreign use and foreign production of about 20 million bales, which has provided plenty of export potential for U.S. cotton. But Anderson warns marketers about the impact of very strong price signals.

“If we have a 10 percent increase in world cotton production and a slight decrease in use, we could play catch up on the supply, stocks and carryover very quickly. We have to be careful in a market like this. When you can see a limit up and a limit down in one day, it’s unusual. So don’t get too optimistic and wait another day to see what the market is going to do.”

Anderson has heard that Chinese mills are moving toward more polyester in their blends. “That’s why I’m prepared for a 2 percent reduction in world demand for cotton.”

Market at top?

Stevens says traditional signs point to a market that has made a top. “However, not knowing what is coming next from the Chinese traders, one has to be cautious. This bull is like the 9-headed hydra. For each head cut off, it grows two more.”

Cotton producer Steve Verett, executive vice president, Plains Cotton Growers, Inc., Lubbock, Texas, likes the high cotton prices, but is concerned that they might not necessarily translate into higher net income for producers.

“I’ve been farming over 30 years, and there’s never been a time when prices for commodities increased, and we didn’t see a corresponding increase in input costs. Whether it’s going to be good for net farm income or not remains to be seen.

 “There are some real scary numbers out here on fertilizer prices. A lot of importers have been caught short. With the early harvest in the Midwest, there have been a lot of fertilizer applications which have drawn the stocks down.”

Verett added that Texas cotton producers are a long way from locking in high cotton prices for 2011. “This morning, December 2011 was at 94.52, which is certainly a good price. We’re hopeful. Corn and soybeans have been enjoying high prices for a few years. The cotton industry would like to be able to take advantage of that too.”