Shurley on Cotton: New OMICRON Variant Causing Panic
November 30, 2021
By Don Shurley, University of Georgia Cotton Economist
It’s not just cotton. All commodities and the US stock market as well, are reeling from news of a new virus strain. Should growers be concerned? Yes. Will prices recover? Likely, but when and how much. And will the market fall further before a recovery?
March futures near $1.16, with a strong basis and good fiber quality premiums here in the Southeast, had many growers looking at $1.20. But fears surfaced on Friday last week with the market losing 4 cents, were down a bit further yesterday, and are currently down limit another 5 cents today. March is currently locked at roughly $1.06½.
Cotton may be more sensitive and vulnerable in this situation than other commodities because 1-much of the run-up in price was due to speculative buying and 2-so much hope and optimism has been built up in World use/demand. Cotton is vulnerable to price decline if 1-speculative interests decide to bail out and 2-this new variant causes demand uncertainty/loss and/or further supply chain problems.
This situation puts the grower in a tough spot. You hate to sell into a down market and hope price will recover; but you certainly don’t want price to drop even more. Many/most growers had a good portion of their crop already priced and were using the strong harvesttime rally to price further.
The drop in price is especially bad timing. Growers were hoping price would stay high while harvest is completed and the cotton ginned and classed. Now with prices in a nosedive, many growers must decide 1-do I go ahead and contract to protect from price falling further or 2-do I wait and hope price recovers but risk price going even lower? Is using Options a way to provide protection?
These answers depend partly on how far along the grower already is on pricing. Some growers are taking no chances and contracting most or a good portion of remaining production. Others are contracting some but leaving some yet unpriced. Some are waiting and hoping for prices to recover.
There is no perfect solution. Decisions also depend on how much risk the grower is willing to take.
USDA’s September estimates released last week increased the projected US crop by 1.25 million bales. This was expected although on the high side. The expected US average yield jumped by 95 lbs per acre.
Projected exports were increased ½ million bales and ending stocks increased 700,000 bales. Surprisingly, USDA’s projection of the 2021 crop average price increased by 4 cents to 84 cents/lb. So, not all must be bad.
The market is down about 10%. There are reasons to be concerned. The panic that growers are feeling is valid. These fears are compounded by the timing—that growers feel they must either contract or wait to finish harvest, ginning, and classing to recap the remaining crop.
Let me also quickly say, however, that these fears and market uncertainty have yet to be validated. The market is acting largely on emotion. Facts have yet to be realized. Today proves the market is certainly willing to take away more in price. But, it is also possible that reality may give some of the loss back.
Prices (March futures) should have support at around $1.05 but, under the circumstances, that may or may not hold. Any recovery may now face a bit of a hurdle at $1.12 to $1.15. Fresh news, especially if it’s good for price, in the way of exports, progress and harvest, weather, and/or demand, will help refocus the market on other things.