Though the U.S. started the current cotton marketing year last Aug. 1 with “what we thought was a very adequate supply of cotton that would keep prices low,” says O. A. Cleveland, that outlook got knocked a-kilter.
“We soon discovered that with the crop that was coming in, coupled with very strong demand internationally, our supply-demand situation was going to look better than we ever imagined,” he said at the annual joint meeting of the Mississippi Boll Weevil Management Corporation and the Mississippi Farm Bureau Federation’s Cotton Policy Committee at Grenada, Miss.
Cleveland, Mississippi economics professor emeritus and now a private analyst for several organizations, says the consensus was that the beginning U.S. carryover Aug. 1, 2009, of 6.4 million to 6.5 million bales would keep prices low.
But, surprise! “In April, we took the July futures contract up to about 84 cents, and we stayed there in a trading range for 19 consecutive weeks. Some were thinking the price was headed to the moon — but basically every time the market got to 84 cents, it would fail to go higher.”
The U.S. decertified some 800,000 to 850,000 bales of certified stocks during that time period, he says, currently at about 200,000 bales. “There are another 50,000 bales, I think, that could come off, so we could be as low as 150,000 bales of certified stocks.
“But, I suspect the 150,000, or whatever is on the board now, will come off and that all the certified stocks have been sold. That doesn’t mean we’re out of cotton, though — the USDA’s figures show us ending the marketing year July 31 with 2.8 million bales.”
Looking at the USDA’s early July Supply/Demand Report, Cleveland says, “We see 2.9 million bales of cotton in inventory as we go into the new marketing year Aug. 1. Last month, the USDA was looking for 16.7 million bales to be harvested this year; now, they’ve increased that to 18.3 million bales.
“We’ll get a subjective estimate the first week of August, and some analysts are suggesting we could go as high as 19 million bales this year. I wouldn’t think it will go that high, but I think the market will look at a range of 18.1 million bales to 18.5 million.”
The USDA has increased its estimate of domestic consumption for 2010/11 to 3.4 million bales, he notes; that’s up 100,000 bales.
“They’re projecting an 800,000 bale increase in exports next year, based on the expectation of a much larger crop and that the international mills are demanding more and more cotton. In particular, demand for U.S. cotton between now and December is expected to be exceptionally strong.
“It looks like we’ll end this 2010/11 market year with about 3.5 million bales in stocks, up about 600,000 bales more than we started with — not really much change. Numerous events could occur that could increase that figure, but I would think the tendency would be to be a bit lower than 3.5 million.”
On the world production scene, Cleveland says, “is really where the rubber meets the road as far as prices are concerned. While from time to time the U.S. crop will dictate prices, over the long haul the world supply/demand situation will be a more important influence on price activity in the futures market.”
The 2009/10 marketing year began with about 63 million bales of world cotton, he notes, the same as for 2008/09. “In the marketing year beginning Aug. 1, we anticipate starting with 50 million bales, 13 million less than a year ago. Thirteen million bales is a very large number to have worked off in one year.
“We’re looking at a world crop in 2010/11 of about 116 million bales, 14 million above 2009/10. This basically keeps China, India, and Pakistan production about where USDA thought they were a month ago.” The big question mark — and concern — in the market, Cleveland says, is China.
“There’s a big production region in northwest China that’s very similar to California and the Mid-South Delta, with very large fields, very good irrigation, and very high yields. It’s the region where the real growth in agricultural production, and specifically cotton, has come from.
“But, it’s at a latitude about on the level with Denver, Colo., and in June, they had two freezes, including freezing rain and snow. Their cotton got off to an absolutely miserable start. It’s difficult to get good, up-to-date information out of China, but it’s reported that they replanted 35 percent of their crop, including large acreages that were transplanted with plants out of greenhouses.
“The USDA is pegging China’s crop last year at 32.5 million bales and 33 million this year, but given the weather problems, I would think that is going to come down some.”
Chinese consumption is expected by the USDA to be up by 1.5 million bales, Cleveland says.
“We really don’t know that much about what goes on with their crop, but over the past three months they’ve taken 13 million to 14 million bales out of their reserves for sale on the open market. Obviously, they needed that cotton. Also, they’ve imported about 5 million bales and remain in the market for another 4 million. They produced 32.5 million bales and have spun 47 million.
“All this suggests that once again China’s consumption has been underestimated. A really good clue is that we’ve seen a tremendous jump in their exports of apparel goods and gray goods — the largest month-to-month and year-to-year increase we’ve ever seen. So, we’re anticipating that Chinese consumption for the current year is going to be about 2 million bales higher.”
The cotton market has been as high as $1.80 per pound, Cleveland says, “though the typical price on their futures board is in the $1.23 to $1.27 range. That’s the price of their cotton, yet we see that their textile growth is booming, as consumers are buying more cotton-rich fibers.”
China’s economy continues to grow “at an abnormally high rate,” he says. “With this recession, they did with their stimulus program what we did in the Great Depression and put it into road building and public works construction. Their stimulus appears to have worked well, resulting in a lot more consumption.”
The USDA is projecting world consumption in the upcoming market year to be up about 3 percent, a bit over 3 million bales, for a total 119 million, he notes.
“With a huge 14 million bale increase in world production and only a 3 million bale increase in consumption, you might think we’d be looking at a big carryover at the end of next year. But remember, our beginning inventory is so small going into 2010/11, we will actually have a decrease in cotton stocks, to about 49 million bales.
“So, we’re looking at a world stocks decline for a second year, and the tightness in supply/demand will continue — all of which points to another good price year for cotton.
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