Too early to hedge, Dunavant tells growers at Beltwide "I would not sell the first bale of new crop cotton with December futures at 62 cents - it's just too early to hedge your new crop," Memphis, Tenn., cotton merchant William Dunavant says.
"I believe there are too many variables facing us to sell now," he advised producers attending the Beltwide Cotton Conferences at Anaheim, Calif.
Dunavant, the world's leading marketer of cotton, says if the December contract should hit 68 cents, "I would hedge 20 percent and every two cents above that I would hedge an additional 20 percent until I was fully hedged."
Growers should monitor the market month to month, he says, to see if new crop conditions change.
"All of us in the merchandising industry, both cooperatives and merchants, will become very excited if China enters the market aggressively for new crop - but I think it will be in December, 2001, or January/February, 2002, before they enter the market."
Dunavant analysts are projecting U.S. planted cotton acreage of 19.2 million bales for the 2001-2002 crop year, with a crop of 15.9 million acres from an average yield of 638 pounds.
But he cautioned that last year's crop projections fell short and "I'm beginning to believe that we don't know how to produce a crop of 19 million bales-plus.
"If we were to produce that much, our carryover would jump 1 million bales to 5.125 million, which is not a bullish number for the U.S."
On the other hand, Dunavant said, "If we produce a 17.2-million-bale crop this year, rather than 19.2 million, the carryover would drop to 3.125 million, and that is an extremely bullish number."
His company's projection for world production is 91.2 million bales, "but in my honest opinion, I believe that will be difficult to attain. We will produce this season only 85.1 million bales, it is very difficult to believe world production will increase by 5.1 million bales next season.
Numbers too high "The current USDA number is 92.2 million bales. In my opinion, they're definitely too high and will reduce their production and consumption numbers in the months ahead."
Dunavant said he feels the world numbers for next season are, at this point, constructive "because we don't have the first seed in the ground and there will be lots of room for big swings because of demand and weather."
The U.S. cotton industry, he contends, "needs to make some adjustments to the qualities of cotton that can be delivered on the New York futures contract. I believe the minimum strength should be raised from a minimum 22 grams per tex to 25.5, and that West Texas quotations should be inserted in the calculation for tender differences. I also believe that 47 to 49 micronaire should be deliverable at a discounted price, and the cotton that is two crop years old should have additional penalties because it has a different value to the marketplace."
The contract should be made stronger, Dunavant said, because the largest volume of the current certificated stocks (some 285,000 bales) is older, lower strength, higher premium micronaire average.
"If differences between (futures) months correct themselves, you could have a rally, but if all these discounted cottons weren't on the contract, it would certainly be easier for prices to move higher."
Commodity funds have, over the last four weeks, changed their position from 35 percent long to 12.9 percent short, he noted. "I like their being short because, if demand follows, they will liquid their short position and we could have a substantial rally. Currently, I don't believe March has much upside potential - but at 60 cents, it's too cheap. I think it will trade from 59 cents to 65 cents prior to first notice period.
"It seems the real potential for a higher market will come with the May contract. I think we will see a fair volume of the certificated stocks move off the contract by May, but not March. There is potential for May to trade over 58 cents at some point, if the export demand for U.S. cotton escalates, as we expect it to do it in the spring."
Dunavant doesn't look for much of the 2000 crop to go to the futures contract, because of the poor quality of West Texas cotton. "I do think we will see a small volume of low strength cotton from the Southeast move to the contract, and that's another reason we need to raise the strength requirements on the contract."
More than 4,000 cotton producers, ginners, scientists, Extension personnel, consultants, and agribusiness representatives attend the Beltwide Conferences.