Muted celebration: Optimism returning to cotton market?

What a difference a little time makes. A few months ago finding anything to cheer about in the cotton market was a little like finding a Mickey Mantle rookie card in an old shoebox in your closet. In recent weeks, however, cotton prices have appeared to be climbing back in the right direction, once again fueling a sense of cautious optimism in the cotton industry.

At the beginning of calendar year 2002 the cotton “A” Index was around 43 cents per pound. Then, about as April rolled into May, the price dropped to the 38-cent level. Since that time, cotton prices have slowly inched back up to the 40-cent mark.

That's reason for at least a muted celebration, according to Shawn Boyd, an agricultural economist with the National Cotton Council in Memphis.

Boyd, who spoke recently to a group of agricultural economists at the annual meeting of the Delta Farm Management Group in St. Joseph, La., says, “We're seeing increased exports worldwide, world mill use is growing, and the projected world crop is responding to low prices with expected 2002 cotton production pegged at 91 million bales.”

That's quite a change from a year ago when, after strengthening considerably from the lows of 2000, the cotton market puttered and then stalled. At the same time, the domestic and world economies weakened, U.S. mill use collapsed, expected Chinese imports failed to materialize, and U.S. and world cotton production numbers began to rise upwards.

“The impact on cotton prices in the United States and in the world was devastating,” Boyd says. “Over a course of 10 months, spot cotton prices lost over 50 percent of their value, hitting a low not seen since the early 1970s. The spot U.S. price began calendar year 2001 at about 58 cents. By the end of March, it had declined to below 42 cents and that decline continued into the summer and fall until the market fell below 26 cents in late October.”

Fast forward to the spring of 2002. With cotton prices in the gutter, uncertainty about the impending farm bill weighing heavy on the minds of growers, and the potential for tightening of payment limitations likely, many chose to plant fewer acres of cotton in 2002, opting instead for corn or soybeans.

Bearing out that sentiment, USDA's prospective plantings report predicted 2002 cotton acreage would be down 6.3 percent over 2001 numbers to 14.77 million acres. Some industry experts are now saying the actual cotton production numbers for 2002 will be even lower than USDA's earlier predictions.

“With cotton prices remaining well below the cost of production for most producers, world cotton production is expected to fall in 2002,” Boyd says. “The largest declines will take place in China and the United States. However, slight production increases in smaller producing countries will likely offset some of these losses. The net effect will be a decrease of about 7 million bales, leaving world production at an estimated 91 million bales, with the United States accounting for about 19.6 percent of the total.”

In addition, Boyd says, world cotton consumption in the 2002 marketing year will likely benefit both from a worldwide economic recovery in the second half of the year, and from the accumulation of cotton purchases made at below average prices. As a result, USDA projects world mill use to reach 95.5 million bales this year.

While world trade is expected to remain flat in 2002, whether or not that happens has a lot to do with what trade positions China takes this year. “The big variable for world cotton trade in 2002 is the extent to which China is a net importer,” Boyd says. “Since 1998, China has been a net exporter of cotton in an attempt to reduce burdensome stock levels. The export position of China is determined more by politics and China positioning for international trade agreements than by their domestic supply-demand situation.”

On a more positive note, Boyd says there are encouraging signs that the decline in U.S. mill use has at last bottomed out. “Mill use is expected to rebound slightly to 7.8 million bales. This assumes some rebound in U.S. consumer purchases that can be captured by U.S. manufacturers.”

Overall, he says, “The 2002 crop, when combined with beginning stocks of 44.8 million bales, provides a total world supply of 135.8 million bales. World mill use is expected to register significant growth and reach 95.5 million bales. With use exceeding production by 4.5 million bales, ending stocks July 31, 2003 would decline to 40.6 million bales and the world stocks to use ration would decline to 42 percent.”

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