Fundamentals Support Cotton

Associated Press
*Cindy Faulkner steers a cotton picker during harvest last November at her family farm in New Madrid, Mo. Prices are forecast to remain strong.

Rising global demand is likely to offset an expected increase in the number of acres planted with cotton in the U.S., building a foundation for high cotton-futures prices to persist.

Cotton prices are up 17% since this time a year ago amid tight supplies and growing consumption, and those high prices make cotton attractive for farmers planning what to plant in the spring. The March cotton contract on the ICE Futures U.S. exchange settled at 71.07 cents a pound Friday.

March cotton prices are likely to stay in a range of roughly 68 cents to 77 cents through spring planting season, analysts say. When the March contract expires, deferred months could carry that price strength into the fall-when the harvest typically weighs down prices?Cbecause of the expected growth in demand.

The world will need all the extra cotton acres it can get this year, given that demand is expected to rebound. Ron Lawson, managing director at Logic Investment Services in Napa Valley, Calif., pointed to U.S. Department of Agriculture data that peg world cotton consumption at 114.36 million bales in the current 2009-10 marketing year that ends July 31. That figure is 10% higher than production estimates in the same time frame.

"If cotton consumption continues to improve at the rate that it has been, you're going to have to see a 20% increase in production just to keep up with demand," Mr. Lawson said.

Since 2006, cotton acreage has declined year-over-year as farmers reacted to higher corn and soybean prices that were driven up in part by biofuel demand. In 2009, U.S. cotton plantings totaled only 9.15 million acres, a 26-year low.

Analysts expect that downward trend to end this year, however, as the high cotton prices offer an incentive for producers to switch. The 2010 U.S. cotton plantings are projected by analysts to come in 6.6% to 9.3% higher than last year at 9.75 million to 10 million acres.

The acreage picture will become even clearer on March 31, when the USDA releases its annual prospective plantings report.

The drop in acreage in 2009 meant U.S. supplies fell sharply. While low supplies weren't an issue during the global recession, as the economy recovers, the tight current supplies are one reason prices have held at these levels.

The International Cotton Advisory Committee, a global advisory group, is expecting an 8.8% rise in world cotton production and a 1.8% rise in consumption. Even with the increase in production, the group sees supply and demand just in balance at 111 million bales for both in the coming 2010-11 marketing year.

The forecast for stronger consumption comes on ideas textile mills will make additional purchases to meet the rising demand that is expected to accompany the forecast economic recovery in 2010 and 2011, analysts said. Consumers tend to cut textile purchases when budgets are tight. But after an extended economic crunch, replacements for worn-out clothing and linens rise to the top of many shopping lists.

Government data already show the demand for U.S. cotton is picking up.

According to the USDA, 6.80 million bales of U.S. cotton have been sold or exported as of Jan. 7. That figure represents 61% of the projected cotton exports of 11 million bales for the entire 2009-10 marketing year.

"The faster we sell out of cotton, the sooner the foreign production gap will be exposed.... It is still a very long nine or 10 months until the new [2010 U.S.] crop will bring relief," said Peter Egli, director of risk management at Plexus Cotton Ltd. in Phoenix.

March cotton futures are trekking near the low end of the 68-77 cent range since hitting a 16-month high of 76.77 cents on Jan. 4.

The dip in cotton prices provides a good buying opportunity, analysts said, as the market builds a solid foundation upon which prices can push back toward the high end of the range. The break in prices came as index funds rebalanced their portfolios following cotton's sharp rally in 2009, which led to outsize gains relative to its share of various commodity indexes.

March cotton futures will hold above the 68-cent level, said Rogers Varner, president of Varner Brothers, a brokerage in Cleveland, Miss. However, the contract will be capped at the 77-cent level as textile mills are unwilling to buy above that point, he said.