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The Rupp Report: Why Is Cotton Going Up, Up, Up?

Jürg Rupp, Executive Editor

It's quite amazing, every time the Rupp Report writes about new cotton price highs, the information is already outdated. Collecting information around the trade is more than ever like a thriller than a reflection of the markets, and these markets have changed a lot in the past decades. Some years ago, the U.S. cotton growers were accused of violating prices via the generous U.S. farm subsidy program. "Year after year US growers were producing big crops of food and fiber," writes Plexus Cotton Ltd. in a recent Market Report. "Stocks were plentiful and farmers in countries without subsidies had a tough time .... Production was additionally enhanced by a quantum leap in seed technology ...."

Fewer Vegetarians Means More Grains
However, Plexus reports, the years of plenty seem to be over for a number of reasons: One is the emerging middle class in countries in Asia and Latin America — above all, China, India and Brazil. There will be some 7 billion people in the world by the end of 2011, and they are consuming more complex food, particularly animal protein. These new eating habits require cultivation of some 8 to 10 times as much acreage as vegetarian diet habits. "In order to support a growing livestock production, an increasing amount of grains is being allocated to feed these animals. While 50 years ago cattle were still mostly grass fed in the US, they get about 55 percent from grains these days," Plexus reports. "With food prices trending higher [up to 30 percent] and not likely to reverse soon, cotton is finding itself in a fight for acres ...." But, what is an attractive alternative to corn and soybeans? Cotton?

Recently, the National Cotton Council reported planting intentions of 12.5 million acres — 14-percent higher than last season's plantings. However, experts predict lower yields due to ongoing environmental problems. As Plexus reports, "despite increased plantings the US crop may not reach more than 20 million bales next season. The world's largest cotton producer, China, may also [have its difficulties]. China's eastern agricultural region is currently experiencing one of its worst droughts in decades." Consequently, the Chinese government may encourage a boost in production of food crops instead of cotton.

Fuel For Food
So, while the global population has grown by a billion people in the last decade, the world is using more of its food crops to produce meat and fuel. The new "green" energy idea is another problem for cotton: "Corn for ethanol has been another important driver on the consumption side," Plexus notes. "About 34 million acres of cropland is currently being used for ethanol production in the US and globally it is more than 50 million acres. This year the US will require over 5 billion bushels of corn to supply its ethanol factories." And — by the way — as an admirer of old cars and bikes, the Rupp Report must mention that more than 5 percent of ethanol in regular fuel is very dangerous for old engines. Just ask your old-timer friends.So there are enough reasons for high cotton prices. As the International Cotton Advisory Committee (ICAC) reports: "Very low world stocks of cotton; limited supply, robust demand and a depreciation of the U.S. dollar may have caused the surge in prices during 2010/11. World cotton production is projected to rise by 15 percent during 2010/11 to 25 million tons, and will be almost equal to projected mill use. ... No growth in mill use is projected for major consuming countries, except for India, where mill use may grow by 8 percent to 4.6 million tons."

Impossible Look Into The Crystal Ball
The ICAC report mentions "that in the current environment of volatility, the ICAC price model may be less relevant than in other seasons. The Secretariat season-average projection for the 2010/11 Cotlook A Index is 156 cents per pound. The projection is not based on the ICAC price model, but on the average price for the first six months of the season and our judgment that during the rest of the season prices would remain close to the average recorded during the most recent month (January 2011)."

Soaring Prices
"NY futures resumed their uptrend this week, as March rallied 1572 points to close at 187.58 cents (synthetic close at 192.25 cents!), while December advanced 1544 points to close at 131.50 cents," Plexus notes in its latest Market Report. "The market seems to have entered the much-dreaded blow-off phase of this historic bull market and it is still anybody's guess as to where and when the top will ultimately be made. Judging by the open interest, which has continued to rise rather than decline, we have to assume that there is still enough fuel left to keep this uptrend going for a while."

Plexus also reports: "The A-index (209.75 cents) and the CC-Index (around 199 cents) continue to trend higher as well, reflecting strong fundamentals in the physical market. Meanwhile, the September futures contract at the Zhengzhou Futures Exchange is trading at around 232 cents, which is over a dollar higher than the December contract in New York. While several weeks ago many traders were still of the opinion that current crop prices would sooner or later collapse, it now looks like new crop prices might be trading up to current crop levels."

Plexus also mentions: "According to economic theory rising prices should lead to demand rationing, as fewer people are able or willing to pay for a certain product. While cotton prices are up by more than 150 percent since last July, price increases in the downstream sectors have not been nearly as pronounced just yet." It will be interesting to see how the retail markets will react to higher prices (See " The Rupp Report: Empty Shelves In Western Stores?" www. TextileWorld.com, September 7, 2010).

February 15, 2011