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

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is already outdated.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 ”
Rupp Report: Empty Shelves In Western Stores?
” www., September 7, 2010)

February 16, 2011