There is more potential for world cotton prices to decline than to go up, says Memphis cotton merchant Billy Dunavant, and “I see no reason for prices to go substantially higher.

“If I were a producer,” he said at the Beltwide Cotton Conferences at New Orleans, “I would sell at any equity because, with the U.S. carryover at 7.9 million bales, somebody is going to be left holding the bag come summertime.”

Cotton loans will start expiring in late July, he noted, and then escalate each month going forward.

“We need for China to purchase much more in the world than my projected 8.2 million bales of imports. It can happen if the Chinese government decides to build stocks, but I'm not predicting that to happen.”

While there could be price rallies of 2 cents to 3 cents if a wave of selling should occur by merchants and cooperatives, Dunavant said, “A major rally isn't in the cards with world production at this season's record level. If the world price declines sharply in the future, New York futures will also decline.”

Lamenting that his forecast at the 2004 Beltwide conferences failed to have much validity, he said he “never dreamed December cotton would trade at 84.80 in the fall and then, in the months following, would drop dramatically with a tight statistical situation.”

U.S. carryover dropped to 3.5 million bales, he noted, and prices for October cotton plummeted to 43.50 cents. “Today, March cotton is trading at 45.30 cents, in the face of huge U.S. and world supplies.”

Two key influences on holding prices at today's low level have been the weakness of the U.S. dollar and the strength of the Euro, Dunavant said. “The world price for competing growths has not plunged, as many of us had thought it would. Maybe world price will drop in relation to New York futures, but it hasn't happened yet to a major degree. It can happen, but only time will tell.”

China can help to stabilize prices, he said, if they start an aggressive buying campaign, “but our people in Asia don't think they will be aggressive until after the Chinese New Year, Feb. 9.”

The reason December futures were strong and went over March by 500 points, he said, was due to certificated stocks being cheaper than buying equities and redeeming cotton.

“If the relationship of world price to futures doesn't change, then March can go over May. I'm certainly not predicting that, but the potential does exist. If you buy producer equities today at 4 cents and redeem the cotton, in my opinion you're buying a loss, given the relationship between world price and New York futures. I hope that relationship will change in the weeks ahead.”

The expectation of reduced production in China and an increase in imports “certainly is a bright spot” for future demand, Dunavant said.

“We see China reducing production next season by 2.25 million bales, from 29 million to 26.7 5 million, with their consumption continuing to escalate, rising from 36.5 million bales to a potential 38 million. Their imports will increase from 8.2 million bales this season to 10.750 million next season.”

At last year's Beltwide Conferences, Dunavant recalled, “I predicted a substantial increase in world production this year, from 93.1 million bales to 102.3 million. We will end up producing 115.5 million bales worldwide. Nobody — and I mean nobody — would have expected that kind of production.

“World consumption has gone up also, from 98.4 million bales to 104 million. That's a nice increase, but nothing can compare to that production number.”

Dunavant announced at the New Orleans conference that, after 19 years of presenting his cotton outlook at the annual event — “the highlight of my speaking engagements” — he will be stepping down as chief executive officer of Dunavant Enterprises in June.

“But,” he said, “I will remain chairman of the board forever.”

e-mail: hbrandon@primediabusiness.com