Recent advances in cotton futures prices of 20 cents to 25 cents are being supported by an improving general economy, a weaker dollar and a tighter balance sheet for cotton fundamentals, according to Gary Adams, vice-president of economics and policy analysis for the National Cotton Council.
Adams, speaking at the 2010 Beltwide Cotton Conferences in New Orleans, noted USDA is projecting 2009-10 global production at 102.7 million bales, which is down by almost 5 million bales from a year ago. Much of that comes from China which is down roughly 5 million bales.
“Another key number is global mill use,” Adams said. “Right now, it’s pegged at 114.5 million bales, up about 3.4 million bales from a year earlier. We are starting to see mill use estimates become more optimistic. So hopefully, we’ve weathered the worst of a global contraction in use, and we’ll see that turn around.”
Adams said the combination of a smaller crop and recovering mill use “is one of the key factors to watch as we go through this marketing year. Will we see an expected decline in ending stocks of approximately 9 million bales? That would be the largest decline since the 2000 marketing year.”
The continued improvement of the global economy is also an important factor for the cotton market, noted Adams. “Projections from the International Monetary Fund are for a recovery and growth of approximately 3 percent. There are concerns. Consumer confidence is not very high, and unemployment is continuing to run at high levels. This could put a lid on consumer spending to some degree, which could temper the growth in front of us.”
The cotton balance sheet for the United States is also tighter, noted Adams. “The current estimate for 2009 production is 12.6 million bales, from a planted area of 9.1 million acres. As you all know we had some weather problems in the Southeast and Mid-South with excessive rainfall and the effects of devastating drought in South Texas.”
According to USDA’s latest figures, roughly 10.9 million bales of the 2009 crop have been classed so far.
Domestically, “we’re continuing to see pressure on U.S. mill use for the current marketing year, 3.4 million bales looks to be a fairly good estimate. That’s down slightly from 2008. Hopefully, we’re seeing some stabilization in U.S. mill use, which could provide some support.”
Adams says a key for support of U.S. prices are exports. “We know that roughly three-fourths of the U.S. crop will find its way into the export channel. The export estimate is about 11 million bales. We are going to be down from the previous two crop years. Part of that is due to the fact that we have fewer exportable supplies going into the 2009 marketing year.
“We have seen some good data coming out in recent weeks on sales and shipments. We still have some work to do to get 11 million bales, but it does appear attainable.”
U.S. ending stocks are also expected to decline, Adams said. “It’s quite a different picture from where we sat a few years ago, with ending stocks of 10 million bales. We have a good chance of seeing that number go under 5 million bales.”
One primary export customer, China, accounts for roughly 30 percent of U.S. exports. “A key to where our exports go depend largely on what happens in China. We know they control their market closely through both the release of reserve stocks of cotton and the allocation of import quotas in a manner to maintain domestic prices above world prices.”
Adams said a smaller cotton crop in China combined with a recovery in mill use, means China “will be in position to import more cotton in the 2009 marketing year. We’ve already seen announcements for 2010 of approximately 8.5 million bales.”
Another big competitor for the United States export market, India, “has seen tremendous expansion in its production. India has also seen growth in mill use, but it has not kept pace with production. A big development in India over the last 12 months is the increase in the minimum support price to a level that was well above where the world market was trading.
“The net effect of that was to make India uncompetitive in the world market, and they had a contraction in exports in 2008. But as we come into 2009, they are in a position with their crop and their stocks to be more aggressive in the export markets. We expect exports to increase out of India.”
A big challenge for the United States, according to Adams, “is to maintain mill demand at these price levels. Hopefully, the economy and the recovery will allow us to do that. But we have to realize there will be some resistance at these higher prices in the form of competition from man-made fibers. That reiterates the importance of the promotion work done by Cotton Incorporated and Cotton Council International.”
The decline in U.S. stocks “sets up a more supportive balance sheet for prices. Another factor is the competition for cotton acres in the United States and abroad. When we look at where the A-Index is currently, and compare that to where it has been historically, we typically see other countries respond (with more acres).
“We are as competitive as we’ve been since 2006,” Adams said, “We’re also looking at input costs that are similar to what they were a year ago.”
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