Will cotton market volatility increase?
Jul 3, 2002 12:00 PM, By Elton Robinson Farm Press Editorial Staff
Uncertainty about the U.S. and world cotton crops could produce volatility in the cotton market, according to a National Cotton Council economist.
At the core of brighter news for cotton is its persistent strong demand. That's being pushed by strengthening world economies, according to Mark Lange, NCC vice president of policy analysis and program coordination.
“In 2001, many economists were forecasting little or no recovery in U.S. economic growth. What we've seen instead has been a rather substantial rate of improvement,” said Lange, who spoke at Cotton Incorporated's 15th annual Engineered Fiber Selection (EFS) System Conference in Memphis recently.
“We're looking at improved economic performance in 2002 worldwide, with the exception of Latin America. So from that, there should be improved offtake and demand for textiles and raw fiber around the world supporting this market as we move into next year.”
Lange said the passage of the new farm bill “is critical to providing some infusion of income for this year and the coming years. It is also a stable program compared to what we expected. The last four years, we've had to lobby for supplemental appropriations for the disaster facing agriculture because of low prices. With this farm bill, supplemental assistance will no longer be needed because a counter-cyclical package rides on top of the bill.”
Lange said criticism that the new farm bill will not curtail surpluses “is wrong. This farm bill is production-neutral. That's because you don't have to plant to get any money out of this farm bill. There's no stimulus for production.
“There is a stimulus for demand. We've eliminated the 1.25-cent Step 2 threshold. That means an additional 400,000 bales to 500,000 bales of business each year.”
While the cotton market has languished at low levels the past year, U.S. prices continue to parallel world prices. The result has been to keep U.S. cotton competitive and push U.S. exports to near record levels.
If the United States is to continue to export cotton at record levels, it must remain price-competitive.
“The United States has all sorts of advantages when it comes to exporting cotton — HVI classing, sanctity of contract and timeliness of delivery,” Lange said. “But if you're going to move 10 million to 11 million bales of cotton into the world market, the way you do it is with price. You undersell the other guy.”
On the prospect that the weakening U.S. dollar could bode well for exports, Lange stressed, “I caution you about getting warm and fuzzy about this helping the U.S. cotton industry. The weakening has been against the Euro and the Japanese yen, which doesn't do much for the cotton industry. We'll have to see some strengthening of foreign currencies out of Asia, other than Japan. And so far, that's not happening.”
Lange added that “uncertainties developing about the U.S. crop and the world market could bring back the type of volatility that we used to see in the New York market but that's been absent for the past 12 months.”
The biggest uncertainty is the status of the Mid-South cotton crop, which is off to a very rough start. “If we don't have a good growing season, I'm very concerned about where yields might end up this season,” the economist said.
Lange forecasts Mid-South cotton acreage at about 3.7 million acres, down 315,000 acres from USDA's March 31 planting intentions report. Southeast acreage will be down about 75,000 acres from the report, according to Lange. Southwest acreage, at 5.7 million acres, probably won't change much, while the West will be down 130,000 to 150,000 acres.
He noted that soybean and corn futures contracts “are both trading higher than a year ago while the December 2002 cotton contract has traded below December 2001 for the entire life of the contract.”
But the December 2003 cotton contract is currently trading higher. “The market thinks there is something different about the December 2003 contract.”
Domestic mill use continues to be troubling, noted Lange. “If we switched the numbers where mill use were 11 million bales and exports were 7 million bales, I think it would alter the way we view the market.
“But I think we have seen the low point with mill use. We think we are on a rebound. We won't see use rate in the next four months like we've seen in the last four months, but I believe mill use will stabilize around 8 million bales annually.”
Lange stressed that declining mill use has little to do with lack of demand for cotton. In fact, U.S. consumers are buying more cotton than ever before. “It's just that the market is being fed by more textile and apparel imports,” Lange said. “Only 3 million bales of U.S.-produced cotton stays in the United States for its entire life cycle — from dirt to shirt.
“We've seen cotton textile imports soar in the 1990s. We are now importing at the rate of 16 million bales a year.”
Lange noted that both the United States and China are reducing stocks from last year. “I project the reductions to be a little bit bigger than what USDA is forecasting. And I think that speaks volumes about where we can be with prices a year from today.”
If the United States forces China to meet its WTO commitment, “we expect them to import as much as 2 million bales next year,” Lange said. “But that's kind of iffy. Production is down significantly from where they were a year ago. Total use is around 25 million bales. The net result is that China will need about 4.5 million bales from somewhere to reduce the demand on their stocks.”
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