Market troubles continue: Good yields help offset price problems

If you're a cotton producer, I certainly don't need to tell you what a sorry mess the cotton market is in. You are well aware of the situation. Prices in the 30's or lower are worrisome and frustrating to say the least.

However, things will improve eventually (history demonstrates that prices never stay at this level very long because producers adjust plantings and/or buying increases).

We can be thankful for good yields this year and LDPs that should get us close to the 60-cent mark in total money. That won't pay all the bills but it's a lot better than 30 cents by itself, and at the yield levels we've experienced the last few years.

The major problems in cotton are not just on the demand side. In fact, neither demand or supply by itself means anything to price — it's how the two relate to each other.

Today's low-price problem has been brewing for two to three years, and when we do work our way through this mess, things will be much better. Counter-cyclical measures, if included in the final version of the farm bill, will be a tremendous help during such times of low prices.

Much has been said about the decline and demise of the US textile industry and rightfully so. Notice in the chart the “Total Demand” for U.S. cotton. If USDA's September projection for nine million bales in exports is realized, total off-take will be slightly above 1999 and the highest since 1997.

The major problem appears to be on the supply side, not demand. What we can see in the second chart is that Ending Stocks, since 1998, have generally been declining in foreign countries while increasing in the United States.

This year (2001), stocks have increased both in the United States and in foreign countries which has led to the extremely low prices we've had. USDA's September report forecasts world production at 96.2 million bales — up almost eight million bales from last year. Of this increase, 2.8 million bales, or 35 percent is accounted for by higher production in the United States. This year, world stocks are projected to increase by almost four million bales — 2.7 in the United States and 1.3 in foreign countries.

As a result, U.S. prices have declined more sharply than the A-Index or “world price.” This has serious implications for U.S. growers because if the A-Index remains high relative to U.S. price, growers get less LDP to help offset low U.S. prices.

It is possible that by the time you read this, USDA will have lowered its estimate of the U.S. crop from the September figure of 19.99 million bales. It is doubtful, however, that a smaller crop will have much impact on price.

The best strategies this fall appear to be taking the LDP and selling the cotton or putting the cotton in the loan as long as the AWP continues to fall. Producers wishing to speculate on a price increase after the first of the year should probably do so only with call options.

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