Cotton surplus weighs heavily on market

Cotton has bullish demand on its side, but there are plenty of bears to worry about. A surplus of cotton worldwide weighs heavily on the market, renowned cotton marketing expert O.A. Cleveland told a group of producers at the recent North Carolina Cotton Producers Association annual meeting.

“A 9 million bale carryover in the U.S. crop — one-and-one-half times our domestic consumption — will compete with the 2005 crop,” Cleveland says.

On the heels of soybean rust being found in the U.S., forecasters see an increase in cotton acres for 2005. Acreage could increase to 14 million acres. The big increases could come in the Southeast and the Mid-South. Texas and Oklahoma could also see increases. Early predictions for this year’s production are in the 19 million-bale range.

Add to this a new surge in average yields as the next wave of cotton genetics technology takes hold and a strengthening dollar and, “We’ll struggle around 50 cents for the new crop,” Cleveland says.

Prices are 30 cents to 32 cents below where they were last year. “There was no way to forecast this large of a crop,” Cleveland says.

A rally in January saw some 100,000 contracts traded over a three-day period, the work of speculative buying and co-op selling.

In the near-future, Cleveland sees 47 cent cotton up to 50 cents to 51 cents for March or May.

For the new crop, he sees the prices ranging from 40 cents to 52 cents, likely in the 43 cents to 48 cents range.

The market could face loan redemption pressure in July and in September just before harvest as catalog sales are made just before harvest. “Loan redemptions could sink prices,” Cleveland says.

“For the new crop, in 22 out of the past 24 years, December has gone to 62 cents,” Cleveland says.

“December trades 45 cents to 55 cents into planting, but a better crop pushes it to the lower end,” Cleveland says. “There’s a chance to see December futures 62 cents to 63 cents. The old crop could go to 51 cents and then come back down.

“We do have some challenges in the 50-cent range,” Cleveland says.

For the new crop, Cleveland advises buying December at 59 cents, buying a call and selling at 65 cents. “The call will cost less than $5 a bale and protect your counter-cyclical,” he says.

The world crop for 2004 could top 116 million bales.

“The good news is, there’s demand, demand, demand out there,” Cleveland says.

A 3.5 percent growth rate in the U.S. economy, as well as growth worldwide is creating more demand.

Mills are responding to cotton prices and will begin pricing further out once prices bottom out. International mills are using futures to buy cotton. “That’s a buying force we haven’t seen before,” Cleveland says. “The mill situation is good around the world.”

India, Pakistan and Turkey account for 30 percent of the mills worldwide, while China accounts for 35 to 37 percent and uses two-thirds of the world’s cotton supply. China’s economy uses 35 million bales of cotton. Strong exports sales to China continue. “As much as 50 percent of the U.S. cotton crop could go to China in the future,” Cleveland says. “China will need 14 million bales this year.”

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