The tighter balance sheet suggests continued support for cotton prices, with a continuing focus on the export market for U.S. producers. Lurking in the shadows, however, are limiting factors that could affect the price, says Gary Adams, the National Cotton Council's vice president of economic and policy analysis.
Speaking at the 81st annual Carolinas Cotton Growers Cooperative meeting in Rocky Mount, N.C., Adams said projected world stocks for the 2003/2004 marketing year are the lowest since 1994, when prices went above 90 cents.
“The question will be, ‘What does this imply for prices for this year?’” Adams asks.
One of the price indicators is the cotton stocks-to-use ratio for all countries except China, which is projected at 37 percent, Adams says. Historically, when this has occurred, world prices as measured by the “A” Index have ranged between 52 and 72 cents per pound.
“Based on the current market indicators, I would say we could have world prices around 60 cents to 65 cents per pound, unless more bearish factors surface,” Adams says. “There's not a lot of downside to the market at the present time.”
December futures, he says, are in the 58- to 59-cents-per-pound range. Historically, there was an average 800-point difference between the farm price and the New York futures. Adams says.
“This would imply farm prices around the loan rate with counter-cyclical payments at or near their maximum,” Adams says. He said the limiting factors on price include the strength in demand, which will be influenced by general economic performance and competition from manmade fibers.
The total supply of U.S. cotton is projected at 22.7 million bales, less than the last two years. After a decline in U.S. retail cotton consumption in 2001, the numbers picked up in 2002 and the first few months of 2003. Most of the increased consumption has been met by imports.
Imports continue to hurt the U.S. textile industry. As little as six years ago, the domestic-to-foreign use of U.S. cotton was 11.3 million bales to 7.5 million bales. That figure has now flip-flopped. U.S. cotton will account for 6.6. million bales domestically while 11.8 million bales could go to foreign mills this year. The domestic numbers could go lower, as imports continue to surge. “Anything above 10.5 million bales exported would give a tightening to the U.S. market,” Adams says.
“Chinese imports are up 40 percent from last year,” Adams says. “The surge of imports is decimating the U.S. textile industry and continues to shift the market's attention to the export market. The pressure on the mills is not expected to decline.”
In the U.S., the yield prospects are reasonably good, with the biggest concern being the northern High Plains of Texas. Outside the U.S., some 78 million bales of cotton are expected to be harvested in 2003, with larger crops in India, Pakistan and China.
On the policy front, there are a number of issues facing the U.S. cotton industry. These include the defense of the farm bill, payment limitations, trade agreements, and a very serious challenge from west African countries over the U.S. cotton program in the WTO negotiations held in Cancun in early September. Brazil is also bringing a challenge against the U.S. cotton program.
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