It's getting to be a familiar refrain: The outlook for cotton prices in the months ahead will depend on what actions China takes in the market.
If projections of a 33.5 million bale carryover Aug. 1, 2004 are on the money, “That is too tight if China is going to be a player,” says Memphis cotton merchant William Dunavant, who gave his annual industry forecast at the Beltwide Cotton Conferences at San Antonio.
“We're projecting an increase in world carryover of 3.2 million bales next year, but that can't be considered bearish at this early stage because none of us knows what China's program will be over the next 12 months. If they want to rebuild their carryover to a comfortable level, then prices next season can be as strong as this season.”
He said China has already purchased 3.4 million bales of U.S. cotton, and “we think they will buy at least another 2 million — it could even be 3 million bales. They have just allocated their quota for 2004 and it is 4.1 million bales. Obviously, it won't all be U.S. cotton, but we will get a substantial part of it. They have been aggressive in wheat, corn, and soybeans, and with a dismal cotton crop, I can't believe we won't be in the mix.
“The Chinese premier had an excellent visit with President Bush recently, so there may be additional excitement in the months ahead for all commodities. China's year-end carryover is going to be drastically low, and they can't afford not to replenish their supply.”
With March cotton trading at 75.70 the day of his talk, Dunavant said he sees a low range for that contract at 72 cents to 73 cents — “but if my numbers prove correct, I see an upside for May at 82 cents. Although we will produce more cotton in the U.S. and the world next year, it won't be in the marketplace until November, 2004. We've got to get from here to there, and it will be a stretch.”
Dunavant analysts are predicting a sharp increase in world production, going from 93.1 million bales this past season to 102 million in the 2004 market year — “primarily because of price.” Consumption is forecast worldwide at 96.7 to 98.8 million bales.
“It's just too early to predict price,” he declared. “I think during March, April, and May this year, we will get a sense of price direction. I think as we look at the new December contract at 68.55 cents, versus March at 75.70, that is a substantial discount, and I don't want to be short new crop cotton at these differences and at this level.
“Looking at corn, soybean, and wheat prices, it's just too early to look negatively at new crop cotton, with the discounts already in place. None of us knows what pressures we'll have on the farm program, because that could quickly impact new crop production if it took immediate effect.”
U.S. exports will “again be the bright spot,” in excess of 12 million bales, Dunavant said.
“I sincerely believe it is too early to be negative on December cotton, and at the current discounts, I would rather be long new crop December. We also think the next 7 months will create a lot of excitement, which could also stimulate new crop prices. Our company has no new crop position at this stage, but I don't want to be short. I think U.S. cotton can be higher in March and May than it is today.”
Noting that “many good cotton producers have decided to exit the business over the last three years,” Dunavant said, “We talk about all the benefits the farm bill has created for agriculture, but good producers are still leaving the business — not entering.
“This season in the Mid-South and Southeast was a banner year for quality, yield, and price, but that was necessary for many producers to stay in business. Hopefully, new seed varieties will offer new opportunities for growers, both in quality and yield.”
The cotton industry has “a real battle over the next few years in maintaining our current farm bill, with no major changes,” he said. “Step 2 marketing certificates, payment limitations, and target price are all threatened.”
Without Step 2 payments to the domestic textile industry, cotton merchants, and cotton cooperatives that export cotton, “all our futures are threatened. If we can't export cotton in volume, like last season and this season, then U.S. cotton could potentially die in the loan, and the total cost of the U.S. cotton farm program will become prohibitive.
“It's crucial for all of us, through the National Cotton Council, to fight hard for maintaining our farm program. The battle will continue and we must be ready to fight for our survival.”