wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 17, 1997) COTTON: While the rest of the world was looking over to Asia and down to South America to see what disasters were taking place, cotton bulls had to look no further than the Delta. Remarkable progress during the month of October forced prices down to new lows.
Cotton made glorious progress during that time, duplicating gains that we saw last ten years ago, and taking everyone by surprise. The big three states in the region racked up gains in yields of 10%, just as they did last in 1987, when the weather was ideal. If the numbers hold up, Mississippi will come within eight pounds of the record set in 1991, 23% above their five-year average. Arkansas stands 13% above its five-year average, only 3½% below its 1994 record.
Anyone in the Delta this July would have been grateful for average yields. Instead, the surprising arrival of rains in early August, the absence of 95 degree temperatures, and low insect pressure all conspired to achieve these remarkable results.
The fresh crop numbers produced the first two-cent move in the market all year, a season certainly characterized so far by very timid movements. This was the first 200-pointer since the response to the October Crop report in 1996, when traders were again surprised by the appearance of 400,000 bales. And in the perverse way that markets work, this punishment to the bulls came at market lows, rather than at the highs.
The November report has provoked a bearish response the past three years, seven out of the last nine years. The December report has caused seven consecutive bearish responses, nine out of ten.
December futures, having dipped below the 70¢ mark for the first time, has gotten off the floor much like a punch-drunk fighter. The market has been going through this spectacle for quite a while. The December 1996 contract spent an hour or so below that level before coming back up for air. March missed the experience, but May spent part of its last two days slumming below the mark. July just squeaked through, but finally October fell victim, spending most of its last two weeks below 70¢, sinking as low as 6820. The current contract is an early casualty to the disease, but so far it has spent less than two hours under water, so to speak.
What's ahead? Obviously, the trend is intact for lower prices. Just as obviously, the price is attractive for any mill, and is poison for most producers. However, the market is not so fair as to be able to reward all its consumers and postpone bad medicine for its growers. Exports, if they continue at these levels, will keep the market's head above water. But the undertow is coming from the Far East. Any suggestions that some of this business will have to be unwound will simply drown this market. That's the great concern that works against the uncanny tendency of prices to mount a post-harvest rally.
Herman S. Kohlmeyer for Ernest Simon
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