There's nothing in the world wrong with the demand for cotton — the problem is with the supply, says Don Shurley, University of Georgia Extension economist.
USDA's December report showed an ending stocks number of 43.5 million bales for the 2001-2001 season, said Shurley at the recent Georgia Cotton Production Workshop in Tifton. “U.S. ending stocks continue to grow. But worldwide, we were on a downtrend in terms of ending stocks. And that's important when we look at the world cotton situation versus the U.S. situation,” he says.
Production has increased considerably for 2001-2002, he adds, ranking this past year's crop as one of the largest in recent years. “Worldwide, we're looking at a production increase over last year of 7.5 to eight million bales. About three million of that is coming in the United States. This is the largest cotton crop since 1991,” he says.
The worldwide mill use number is estimated at 91.6 million bales and, by all accounts, that should be a good number says Shurley. “The demand for cotton worldwide continues to do well. But our mill industry here in the United States has struggled. Our mill industry is down, we're shipping our cotton somewhere else, and those foreign mills are doing very well. Our cotton is showing up in other mills. They manufacture the products, and some of those are shipped right back to the United States,” he says.
U.S. mill use dropped below the eight million bale mark, according to the December report, down to 7.90 million bales.
U.S. production for 2001-2002 is estimated at 20.06 million bales from 14.14 million harvested acres. Total supply is set at 26.07 million acres and exports at 9.80 million bales. Total use is forecast at 17.70 million bales and ending stocks are estimated at 8.40 million bales.
“World demand for cotton was in an up trend for a number of years. But we have tried for two or three years in a row now to break that ‘magical’ 92-million bale mark, and we haven't been able to do it. In the 2000 crop, USDA at one time had estimated world consumption at 92.6 million bales, but we never made it. That's one reason we were looking at 60-cent cotton in late 2000, and then it dropped to less than 30 cents,” says Shurley.
Still, he says, it's encouraging in the long-term to see worldwide consumption at more than 90 million bales. “If our world demand stays above 90 million bales, odds are that production eventually will come up short, and that will spike prices. In 2000, the shortfall we were expecting never occurred, and consumption wasn't as robust as we thought, so things just kind of fell apart.
“Long-term — not now — if worldwide consumption remains this strong, and our ability to consistently produce a 90 to 92-million bale crop is questionable, it would tend to support the idea that we eventually could tighten up these stock numbers and get better prices,” says Shurley.
The U.S. mill-use numbers have dropped considerably in recent years, he says. In the 1998 crop year, mill use was at 10.4 million bales, compared to the less than eight million bales forecast for this year.
“If we take mill use back one more year, to 1997, the number was more than 11 million bales. We've dropped 30 percent or more in our textile business since 1997. Fortunately, even with this change in mill use, exports are doing tremendously well. And that's part of the reason for the recent price rally. But, while exports are doing very well, it took 30-cent cotton to do it.”
The U.S. total cotton use, at about 18 million bales, is doing very well, says Shurley.
However, U.S. ending stocks are estimated at 8.4 million bales.
“That's a huge load of cotton. Basically, ending stocks is a projection of how much of this year's crop we'll have on hand when we start harvesting the 2002 crop. When we take that 8.4-million bale number, and compare that to mill use and exports, we're going to have almost half a year's worth of need before we even begin harvesting the 2002 crop.
“We already have half a year's consumption need in the pipeline before the pickers ever start rolling this year. This tremendous load of cotton is exactly why prices are so weak right now. Unless we get some supply shocks along the line, it's going to be difficult to pull out of this.”
The trends in stocks in the United States and in foreign countries have been going in opposite directions, notes Shurley. Since the late 1990s, the United States slowly has been in a trend of increasing stocks. This, he says, is a result of the erosion of the U.S. textile industry.
The United States has had the potential, he says, to make a 20-million bale crop in the past two to four years. “The weather just didn't cooperate prior to this most recent year. We've had the acreage to make this kind of crop in the United States. The disaster that has occurred in terms of prices could have happened several years ago. This thing has been brewing now for a couple of years.”
There's nothing negative in the December USDA report, says Shurley, but there also is nothing in the report that could sustain any type of price rally.
“If you're holding cotton now, and taking your POP payment, the 40 to 42-cent area probably is where you should be pulling the trigger on some cotton. Something will have to come along and shock the supply side to break out of this. The price rally in December was nice, but the reality is that we still have too much cotton, and it will take awhile to work through this. I feel like 40 to 42 cents will be the top price over the next several months.”
No one knows at this time what impact a new farm bill might have on cotton acres in 2002, says Shurley. “I suspect that even if we do see an acreage decrease, the total acres still will remain high in the near-term.”