The fuel for recent rallies in the cotton market is two-fold, says University of Georgia Extension economist Don Shurley. One is an occasional air of trader optimism spilling over in the form of speculative buying, and the other is strong demand, which is showing up in the form of good U.S. export numbers.

World production for 2004 now stands at a record 115.6 million bales, with demand also at a record level of 104.4 million bales. But that's still 11 million bales below 2004, says Shurley.

“As a result, the stocks-to-use ratio will balloon to 45 percent compared to 36 percent in 2003. The keys to the price outlook for the 2005 crop are simple — the level of U.S. and world production and demand,” he says.

It's simple, he adds, but far from certain. “The critical factor is China. China's textile mill industry has boomed. For 2004, China is expected to use 37 million bales of cotton compared to 29 million bales produced.

“And, more importantly, that's 29 million bales based on increased acres in 2004 and very good yields.”

China, he says, is expected to import about 9 million bales, or more, much of which will come from the United States. “It's likely that China may continue efforts to increase cotton acreage and production to support its burgeoning textile industry. The need for imports will depend on it's own production and the pace and need of its mill industry. Clearly, the textile industry has outgrown China's production capacity,” says Shurley.

U.S. farmers planted 13.8 million acres of cotton in 2004 and had a record yield of 846 pounds per acre. The crop now is estimated at 23 million bales. Total off-take (U.S. mill purchases plus exports) are expected to be about 19 million bales. This is a good level, says Shurley, but it's still 4 million bales less than production.

It is likely, he says, that U.S. cotton acreage will increase in 2005. USDA's planting intentions estimate for 2004 was 14.4 million acres compared to the 13.8 million acres actually planted.

“Lower prices for alternative crops and LDP protection provided for cotton prices may result in increased acreage this year. Unknown but possibly offsetting factors, however, include high fuel, fertilizer and seed costs.”

Assuming U.S. acreage increases but yields return to more the norm, and assuming China acreage remains near the 2004 level but at slightly less yield, the world cotton crop for 2005 could be 105 to 110 million bales compared to just 115.6 million bales in 2004, says Shurley. The U.S. crop would be about 20 million bales or 3 million bales less than in 2004, he adds.

“If world demand can maintain 2004 levels or even continue to grow, you can see that production could be close to use. This would support prices. If production should come in at the high range of expectations, however, it will be difficult to hold prices at 2004 or higher levels unless demand grows significantly.”

One worrisome statistic, he says, is the potential of a continued increase in U.S. stocks. “If the U.S. makes a 19 to 20-million bale crop in 2005, and U.S. mills purchase only 6 to 7 million bales, the United States would have to export 13 to 14 million bales to avoid a further buildup of stocks. We could not do that without large exports to China. So again, China's production and need for imports are crucial.”

Unless cotton futures get to about 61 cents, says Shurley, the money to the producer is never going to change.

“It all will be a combination of cash plus LDP or loan plus equity that adds up to about the same money. So, it would seem to me that trying to position yourself with puts and calls to gain additional money from moves in the market might be one way to gain additional profits — at a risk. Going back to the 35 to 55-cent price outlook scenario, the purchase of puts at the top end of that range might be a reasonable strategy.”

e-mail: phollis@primediabusiness.com