When we look at the size of the crop that's being forecast by the USDA, it's hard to see a lot of upside price potential, says Gary Adams, vice president of economic policy analysis for the National Cotton Council.

“There is still potential for things to happen before harvest,” he said at the annual meeting of the Cotton Board in Seattle. “We have to keep in mind that the USDA report is based on survey work the latter part of August, and would not reflect any problems related to recent hurricanes. I have to feel this is a higher-end estimate and that we could back off just a little.”

But, with 107 million bales forecast for world production and consumption of about 101 million bales, “this suggests a recovery in stocks relative to 2003,” Adams says. While a recovery back to 40 million bales “is low in comparison to some historical levels, it's important to keep in mind the amount of stocks outside of China, which is probably what the market pays attention to as much as anything.

“Looking at that, we'd be second only to 2001 in terms of stocks levels, and from that standpoint it's understandable to see the pressure on price over the last several weeks — substantially below where they were in the 2003 marketing year. Prices are pretty much in line with fundamentals underlying the market.”

Looking at the market price outlook plus payments from government programs, Adams says, “We're looking at a price for the 2003 crop marketing year just ended of around 63 cents a pound, which will translate into a total counter-cyclical payment of about 3.2 cents per pound.

“Given the way the fundamentals are shaping for the 2004 year, it's looking more like 2002 or 1999, with prices moving back below the loan rate and a very good chance of a maximum counter-cyclical payment — which puts us back in the marketing loan game, somewhere around 8 cents or 9 cents right now.”

Producers need some good conditions to realize this estimate for the 2004 crop, Adams says, “but unless some problems develop and consumption exceeds production, stocks will very likely rebuild.

“In terms of any price outlook that hinges on final crop size, what China ultimately decides to do from a trade standpoint — how much will they import, will they decide to rebuild their stocks — will be a factor in terms of China's ultimate decision.”

New York futures this year have ranged from as high as 80 cents to the low 40-cent range, Adams notes, that decline driven by expectations for the big 2004 crop The USDA forecast of just under 21 million bales for the U.S. crop is an increase of about 2 percent for all cotton, he says, a bit less than 2 percent for upland, and a big increase — almost 43 percent — for extra-long-staple (ELS) cotton.

The real jump in expected production is based on yield more than acres, Adams says.

“The USDA's most recent report rates 70 percent of the crop in the good to excellent category, well above the 10-year high and well above where we were this time last year. Almost all the adjustment from last month's report occurred in Texas, up 700,000 bales, from 6.3 million to 7 million. If realized, that would be far and away a record for Texas.” Average yields across the Cotton Belt were placed at around 760 pounds per acre, about 30 pounds above last year's record.

e-mail: hbrandon@primediabusiness.com