World demand good news for cotton The U.S. cotton market's negative reaction to USDA's December crop report hopefully is only a detour and not a dead end, says Don Shurley, University of Georgia Extension economist.
"It's something we'll have to negotiate through," says Shurley. "The market was set back, maybe readjusted for awhile. But in the long run, maybe it'll help us in terms of exports and bringing us back to where we need to be."
Without question, contracts were down because of the report, he adds. "Everyone builds up expectations. And, as long as things happen according to expectations, everything is okay. But when those expectations and forecasts don't pan out, then things are adjusted. We're in for a time of adjustment. We don't know how long it'll last. But perhaps in the long run, we'll be able to pull out of it," said the economist in early December.
Looking ahead to the 2001 market, Shurley says USDA's current numbers indicate an all-time record world demand for cotton. The big unknown, he says, is whether or not this demand can remain at current levels.
"We're seeing increasing competition from polyester and other man-made fibers. But despite that competition, world consumption of cotton is on a record-setting pace. And that's in the facing of increasing competition, particularly from polyester," he says.
It was commonly rumored, says Shurley, that there would be production cuts this year in China, India and Pakistan. "But all of this hasn't happened. We'll need to keep watching this situation to see if there are more production cuts as we get further into the winter months."
The A-Index or "world price" of cotton is at its highest level in about two years, he says. "What you receive for your cotton in U.S. futures prices tends to track hand-in-hand with the world price. So, we need for the A-Index to continue to remain strong. If it does, it'll support prices that farmers receive for their cotton. It does, however, have a negative impact on your LDP or POP payment."
Most of the price declines from 1997, 1998 and early 1999 were related to the Southeast Asian financial crisis, notes Shurley. "But we've pulled out of that. Up until this year, we've been in a declining situation in terms of cash price. Fortunately, we've had a POP or LDP payment to add onto the top of that cash price. This has kept us at least in the mid to upper 60s. This year isn't shaping up to be as good as the past two years.
"Our cash prices and futures are improved. But, due to the strength of the A-Index, our adjusted world price is up and our POP or LDP is down. We want to pull out of this and be as well off in terms of total money as we were in 1998 and 1999.
"We stand a chance for our prices to improve as we enter the winter and spring months. But it's important that the world price of cotton remain high. That is directly related to U.S. supply/demand and stocks. If stocks remain tight, and supply remains relatively short compared to demand, and demand remains strong, there's no reason we can't continue to have that A-Index up around the mid-60s and up to 70 cents or better."
In looking at where cotton prices might weaken, Shurley thinks there's a good floor of about 64 or 65 cents. "We've still got good support at 64 or 65 cents. Looking at marketing plans for the 2001 crop, there's no indication now that we'll get down to the support area. There's a good possibility that we'll get back up to the 68-cent level, maybe even move up to about 70 cents."
Ending stocks are estimated at about 35 million bales, the lowest level since 1995, he says. World demand, meanwhile, is up above 92 and a half million bales.
"Only two times during the decade of the nineties have we been able to produce that much cotton, and that was in 1991 and 1995. This tells me that if demand remains strong - in that 90-plus million bale range - we'll continue to drive down stocks. If demand falls back into the eighties, it's a different story."
Shurley also explored the relationship between the A-Index and the stocks-to-use ratio. The stocks-to-use ratio, he explains, shows how tight supply is relative to demand.
"When the stocks-to-use goes up, that means supply is relatively adequate. When it comes down, supplies are becoming relatively tight. USDA currently projects a 2000 crop year ending stocks-to-use ratio of 38 percent. Historically, this type of supply/demand balance situation has moved the A-Index into the 70-cent range. Should this hold true, the A-Index should continue to increase as the 2000 crop marketing year progresses and, hopefully, U.S. prices will track upward with it."
While the price outlook for winter-spring 2001 appears optimistic, the United States has two potential problems that very likely could lead to price weakness by harvest time or earlier, says Shurley.
"First, U.S. cotton acreage hasn't responded to low market prices. Low prices for alternative crops and high cotton LDP's have encouraged acreage to remain in cotton. Below-average yields in 1998, 1999 and 2000 have been the only thing preventing the U.S. from having consecutive 18 to 19-million bale crops."
Secondly, he adds, U.S. mill consumption has dropped tremendously. "U.S. mill use of U.S.-grown cotton has dropped from 11.13 million bales in 1996 and 11.35 million bales in 1997 to below 10 million bales projected for the 2000 crop - a decline of more than a million bales.
"U.S. consumption of cotton continues to increase annually, but a larger and larger percentage is coming from imports of fabric and finished products. This means that U.S. cotton producers are becoming increasingly dependent on foreign mills and exports for price direction."
Shurley advises growers to keep an eye on the markets and to be prepared to make a decision as prices reach the 67 to 68-cent range. "That would be a good opportunity to lock in part of the crop. You might want to take advantage of the prices when they're high this spring rather than having too much cotton and trying to do something next fall."