wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) COTTON: Prices fell almost a cent-and-a-half this week. It is the largest loss in almost three months, the third worst break of the year. And it is not difficult to explain.
China aside, the harvest is at hand in the Delta, and the crop is still growing in West Texas. The October crop estimate may be down a shade, but I continue to believe the final outturn will be larger. This report has not had nearly the price response as the one in September, but we have had three two- cent moves in the past ten years, one up, two down. Yields have increased four times, decreased the same number, and come in exactly unchanged twice.
Regardless of history, last month presented us with almost ideal weather across the belt. When we saw the crops in early July, it was obvious what an early cold snap could do. But that hasn't happened. Weather conditions in September have been as close to perfect as possible, a plant breeder's delight. Greenwood had an average high of 88 degrees, a low of 64 degrees, an average 1 degree above normal, with rainfall 67% of normal. Lubbock enjoyed an average high of 86 degrees, a low of 63 degrees, 2 degrees above normal, with rainfall 98% of normal. Albany, Georgia had a high of 90 degrees, a low of 68 degrees, 1 degree above normal, with rainfall 72% of normal, Lubbock had a spell of temperatures at the end of September and the beginning of October with highs 12 degrees above normal, just what the late cotton needs. The potential for a larger crop rests out there, and it is a real one.
Hurricane watchers have been terribly frustrated. There has been only one named storm in the Atlantic and Gulf regions for the past two months, the first time that has happened since 1929. And, for another vital fact, if no storm crosses the Texas Gulf coast this season, that will make nine clean years in a row, breaking a record that goes back before the beginning of the century.
It's poetic justice that the highs for this market in March were made on the threat of an Australian cyclone, one last false note which rang in the beginning of this bear market. We've been labeling this a trading range affair for a long time, but it deserves another name now. Prices have been going down for almost six months, values losing 10%. That's enough to call it a bear market.
On another scale, the front futures contract has had a floor at 700 since the end of June, 1996. Since then, over 90% of the weekly closes have been between 700 and 760. That came to an end this week, with October closing at 6938. Prices are slowly digging into lower territory, and I don't think it would be normal for this trend to stop at this time of the year. As we see it, you should expect more of the same for awhile.
The one bearish feature that few could have foreseen back in March was China's new cotton policy. That is far and away the most significant piece of news we have had to deal with. If you add that together with good crops around the world, it seems to defy both logic and gravity to suggest that prices can reverse themselves at this time.
Herman S. Kohlmeyer for Ernest Simon
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