It's been a while since William B. Dunavant had much to say about an upside to the cotton market. But it dominated his talk during the recent Cotton Roundtable in New York.
Dunavant said that after cotton buyers transition between old crop and new crop cotton this month, prices should move higher. Should there be a problem with production somewhere in the world, prices could get as high as 73 cents, Dunavant noted.
Behind the price strength is the steady progress the United States and the world has made in reducing carryover, the chairman of Memphis, Tenn.-based Dunavant Enterprises Inc. said via telephone at the Roundtable. It was sponsored by the New York Board of Trade, Ag Market Network, Certified FiberMax Cottonseed and Farm Press Publications.
“We have really made progress in this cotton marketing year. The United States started out with about 7.45 million bales of carryover, and we project 5.6 million bales starting the 2003/04-crop year. That's good. And we've seen prices respond from the 30s to close to the 60s over the last few months.”
Dunavant's economists are projecting domestic consumption next marketing year to drop from 7.3 million bales to about 6.8 million bales, “as we continue to see the erosion of the domestic textile industry. It can go lower than that.”
Dunavant projects exports this coming season at 11.5 million bales with the possibility of going as high as 12 million bales, “if China has problems with its crop.
“Put this number together with our crop size of 16.8 million to 16.9 million bales, and we see our carryover dropping to 4.2 million bales next year, which is quite friendly to prices.”
To top it off, “there is a tremendous world demand for cotton out there. Is it active today? No, it's pent up. Basically all consuming markets — including the United States — are fighting the transition to the new price level,” he said.
“After the vacation period in Europe is over (around the middle of August), we will see the world coming in aggressively to buy cotton. And they need to buy cotton. Our volume of sales over the last two weeks has picked up for all new crop growths, even in the United States.”
Worldwide carryover may not drop as much as USDA has projected, according to Dunavant. But his figures are friendly to prices nonetheless. He projects world carryover dropping from this year's 36.2 million bales to 33.6 million bales next marketing year.
Dunavant projects world consumption for 2003/04 of “somewhere around 98.7 million bales,” which is slightly lower than USDA's 99 million bales. Meanwhile, Dunavant projects that the world will produce somewhere around 95 million bales to supply that need.
China continues to dominate the news in cotton prices, as its consumption approaches 30 million bales, noted Dunavant. “China is the name of the game for all of us as we look at prices this coming marketing year.”
China's cotton crop, estimated to be above 27 million bales may actually drop below that to slightly under 26.5 million bales due to serious flooding in parts of China, Dunavant said.
China's expected 8.6 million bales of carryover this year is expected to drop to about 8.2 million bales next year. “Again, China will be an aggressive buyer this marketing year. But I think it will come in spurts. They'll come in and buy 200,000 or 300,000 bales, then back out and wait a couple of months. They certainly will take a look at their own crop before they get overly aggressive buying cotton.”
Dunavant also expects consumption increases in other major consuming markets, including Turkey, India, Pakistan and Brazil.
The only negative for demand in the world is the United States where the U.S. textile industry continues to erode, according to Dunavant. “It is real sad to someone who grew up in the cotton industry to see this wonderful industry disappear, and it is disappearing. I don't think any of us can argue that.”
Dunavant says to look for production increases in South American cotton crops. “The reason is price. It's considerably higher, and they will respond. We're looking at well in excess of a million bales in increased production in Paraguay, Argentina and Brazil.”
Meanwhile, Australia is still experiencing a very severe drought. “We think the crop they just finished harvesting is going to be about 1.6 million bales versus about 3.2 million bales last year. We show an increase to about 1.75 million bales this coming marketing year. It could jump to a little over 2.0 million bales with timely rains.”
Dunavant sees a trading range for cotton from 57 to 58 cents on the low side to 73 cents on the upside. “We are going to continue to be in a very volatile price range for New York futures.
“The reason we picked the 57-58 cent price range for the low is that we have seen what can happen when the commodity funds and the speculative community get too long or too short. This past Tuesday they were 37 percent long.”
Any upside in the market will come later, according to Dunavant, “because customers around the world will fight, fight, fight price as they jump from current crop to new crop.
“You're looking at a 350-point spread between the old marketing certificate and the new marketing certificate. I think you'll see big shipments in the next three weeks, because they are going to get it considerably cheaper than they would after the middle of August.
“The equity levels for growers between now and the first of the year for new crop could get to somewhere between 2 cents and 5 cents,” Dunavant added. “If something goes wrong in any major producing areas in the United States, then I think cotton will rush higher soon.”
If equity levels rush higher, “we're going to get out of the marketing loan and the grower is going to have to look at the futures market and the cash price for his return,” he said.