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Why Cotton's Price May Fray

Commodities Corner | MONDAY, MARCH 1, 2010

By DEBBIE CARLSON

Long-term price prospects fade.

COTTON PRICES HAVE ADVANCED STRONGLY in the past two weeks, but the rally is starting to look a little ragged.

The ICE Futures U.S. May contract cotton price has had a tough time poking through the 80-cent-a-pound level -- although it did last week -- following its nearly straight-line rally since the Feb. 5 low for the year. In the short term, May cotton prices are likely to pull back to around 74 to 75 cents a pound until there is fresh news to guide direction.

Commodities joined the other markets that plunged on Greek-debt worries in February. Cotton fell to 67.80 cents on Feb. 5. But on Feb. 9, the U.S. Department of Agriculture increased its export estimate more than expected and lowered total supplies, known as ending stocks. That was a bullish signal: Cotton was too cheap, and supplies needed rationing.

In addition, ICE data released Feb. 9 showed that speculators had virtually no position in cotton. They then started buying, sparking the rally. Friday, May cotton settled at 82.46, up 4.4% on the week.

For now, cotton appears fairly valued at just under 80 cents, market watchers say. Mills that bought cotton to satisfy foreign demand have enough, and speculators have amassed about 20,000 long, or bullish, contracts, according to ICE data. Sharon Johnson, senior cotton analyst at First Capital brokerage in Atlanta, says May cotton can easily fall back to the 74-to-75-cent range.

But while cotton prices could get a bit threadbare here, she's not ready to get bearish for the near term, as speculators could easily double their bullish position, and the market will be influenced by other commodities and dollar action.

LONGER-TERM PRICES COULD fall sharply, however, particularly for the December contract, which represents the autumn harvest.

The high cotton prices have likely lured farmers back to planting fiber over food this year. The USDA said recently that it's projecting 2010 U.S. cotton acreage to be up 1.5 million from 2009, to 10.5 million acres -- a 15% hike. That comes at the expense of grain acreage, which had supplanted traditional cotton land when grain prices were higher in recent years.

Shawn Hackett, president of advisory firm Hackett Financial Advisors in Boynton Beach, Fla., says the rally came early enough to allow more farmers to consider cotton. On March 31, USDA will release its prospective plantings report, a survey of farmers' planting intentions for spring crops. Hackett's stance: "I would short the December cotton contract. If we get three million acres versus the 1.5 million, decent weather, trendline yield and reasonable demand expectations, we could double ending stocks in the next cycle. That's not record supplies, but it could pull back prices to 50-to-55 cents."

First Capital's Johnson agrees that December cotton could fall that far, noting the chance for good yields due to great planting conditions from California to the Carolinas. Plentiful soil moisture during planting is "as important as higher acreage," she says.

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