Strong U.S. demand lifts cotton market

The United States is the “600-pound gorilla” in the cotton consumption business, says Auburn University Extension Economist Bob Goodman. And luckily for growers, the gorilla is eating well these days.

“We grow 18 million bales and we ship 10 or 12 million raw bales overseas. Then we ship 3 or 4 million more as textiles,” says Goodman. “But we bring them all and more back for a total use of 24 to 25 million bale-equivalents each year in T-shirts, jeans and other products. We're the furnace of the world's economy.”

Goodman gave an overview of the world cotton market at this year's Wiregrass Cotton Expo, held in Dothan, Ala.

Reports are forecasting that the world could produce 102 million bales of cotton this year, he says. “And that sure looks bad. But we can look at that in a different way. We can look at each cotton-producing country and see what we think the likelihood is of producing a 100-million bale crop. We also need to look at the demand side of the equation — maybe we're ready for a 100-million bale crop,” he says.

There has been a continuing upward trend in cotton production and consumption, says Goodman.

“As a fundamental economist, I believe in the law of supply and demand. If there's too much of something, the price will go down. If there's not enough of something, the price goes up. The trend in world cotton production has been that we go up a little over a million bales each year. So sooner or later, we'll produce that 100-million bale crop, and it probably will be real soon,” he says.

It's helpful, says Goodman, to look at the recent production history of the countries that produce cotton. “If we look at the former Soviet Republic, we see that they won't produce a lot of cotton this coming year. A couple of those countries are recovering, and they're going to produce more than they did last year. But on the whole, they're not likely to produce a lot more cotton. They're at about 7 million bales, and they're no longer a big player in the world market,” he says.

Over the long-term, Turkey has seen an upward trend in production, notes Goodman, but their cotton crop has leveled off in recent years. “There are only 2 million bales between their bottom and their top production, so Turkey isn't a big factor in the world cotton market.”

India and Pakistan are in similar situations, with neither country rapidly increasing their cotton production, says Goodman.

Brazil is increasing cotton production rapidly, he says, having produced 5 million bales this past year and exported 2 million bales.

“Brazil likely will increase their production even more if possible. They've increased rapidly over the past decade and skyrocketed over the past couple of years. But you have to wonder how much of an increase their infrastructure can sustain. Ultimately, they might could produce 10 million bales, but it won't happen next year.”

The United States continues to be a major player in the world cotton market, says Goodman. “We produced 20 million bales at one time, and it's being forecast that we could produce more than 20 million bales of cotton this year. It's definitely possible, but will it happen?”

If the United States does produce 20 million bales of cotton in 2004, it'll be because the weather cooperated “really well,” he says.

China remains the big unknown in the world market, says Goodman. “They say they produced more than 25 million bales one year. They could produce 20 to 22 million bales this year, but no one knows.”

Looking at 2003, the world produced about 93 million bales, with the United States producing more than 18 million and China producing about 22 million bales.

“My best guess for 2004 is that the U.S. could produce 20 million bales and China again will produce about 22 million bales. Brazil again will produce 5 million bales and could produce a little more than that. I'll allow Australia a little more in 2004, and India and Pakistan will produce about what they've been producing.

“With a 3-million-bale increase in the rest of the world, it all adds up to about 98 million bales. The world could produce 100 million bales this year, but weather will be a factor, as always.”

Turning to supply and demand, Goodman says the world cotton consumption trend is increasing, and it's increasing at a faster rate than production, if that's possible.

“The leading consumer of cotton and everything else in the world is the United States. The gross GDP of the U.S. is ten-thousand billion dollars. And the next country — Japan — is about one-third of that. Japan's economy is 38 percent the size of the U.S. economy. Germany's economy is 19 percent, France's is 14 percent and Canada's is 7 percent the size of the U.S. economy.”

The United States, says Goodman, is the great consumer. “Demand hinges on what happens in the U.S. That is critical in the cotton market. The United States can consume its share of that 100-million-bale crop, whenever it occurs.”

As the demand for cotton remains strong in the United States and the world, the potential for higher cotton prices through the 2004 season is very good, he says.

The best thing that could happen to keep the U.S. cotton crop from becoming too big, says Goodman, is to have low prices now and to have a higher price outlook for the fall.

“Many times, we have high prices in the spring, and we plant a big crop only to see lower prices in the fall. I'm hoping it'll work out to be the reverse situation this year.”

For practical marketing, Goodman says he would book cotton this year on December futures above 65 cents. “I think there's still an opportunity for prices to go up. The 65-cent New York futures price will give you an effective price of about 60 cents. That'll raise the price floor a nickel above the loan rate, and it'll be a big boost for you. And if prices go up, the value of that call option will go up to some extent, and you'll participate in the price increase.”

For peanuts and corn, he advises that growers book now. “I wouldn't plant anything that's not booked. Those prices are extremely attractive — also for wheat and soybeans — and that could be the big factor that keeps us from having a 100- to 102-million-bale cotton crop this year.”

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