The cotton market appears to be in some real trouble, with worries on both the supply side, where there is a global over-supply of the natural fiber, and the demand side, where U.S. mill use is trending lower, a market analyst says.

“Three years ago, domestic use was 10.2 million bales,” noted Rich Pottorff, Doane Ag Services in St. Louis, Mo. “This year, we'll be lucky to do 7.5 million bales. That's a 30 percent decline in just three years.”

The good news/bad news analogy applies to almost every aspect of the cotton outlook. Exports are doing well. That's good. But that's partly due to low prices, which is bad. We're expecting a decline in cotton acreage this year in the United States. That's good. But it's probably not going to be enough. That's bad.

“With a total use expected of around 17 million bales for the coming year, we need about 12.8 million harvested acres, or 14 million planted acres, assuming a trend yield of 640 pounds,” Pottroff said. “The fact is we really need less than that because we start the year with a half year's production already in storage. We need to go down to 12 million acres for a year or two just to get things back in balance.”

Pottorff doesn't see that happening. “Our estimate is that we'll plant 15 million acres this year. So with trend yields, we'll build stocks. And I don't see any change any time soon. Both the House bill and the Senate bill provide some economic support for the cotton sector (and don't address the problem of potential over-production).”

“Our forecast suggests that the long-term outlook for cotton is bleak. We build stocks, build stocks and build stocks and there's nothing in the farm program to prevent that. It's hard to see how we get out of that trap unless you can convince farmers not to plant cotton, through a set-aside program or making the other crops more attractive.”

There's more bad news with China's entry into the WTO, according to Pottorff. “That's a real problem for us and could get worse. We agreed to phase out our quotas on their textile products more rapidly than we were set to phase out prior to that. So we could face even more textile imports in China.”

One positive for reduced cotton acreage, according to Pottorff is that the cotton insurance program, “will be less attractive this year.”

One crop where U.S. acreage has been declining since the 1996 farm bill is wheat, with over 15 million fewer acres than in 1996. “Obviously, wheat has not been a big attraction for wheat growers,” Pottorff said.

Carryover stocks have been declining. However, U.S. demand growth still depends on exports, “and that's an uphill struggle with the strong dollar and the stiff competition.”

Smaller wheat crops in Canada, the United States and the European Union, “gave us some hope that we'd see stronger prices and tighter stocks. Fact is, the relatively minor traders have been big factors this year. Eastern Europe exported three million tons and the Former Soviet Union exported about 4.5 million tons. They've really taken up the slack.”

This is also a sign that these countries, “are really getting their acts together and could become major players in the wheat market.”