December ‘04 cotton Futures contract is the most undervalued contract on the New York Board of Trade, according to Calcot's vice president of marketing.
Jarral Neeper of Bakersfield, Calif., told a conference of key Western cotton consultants and growers recently that the market has not bought into the fact that soybean and corn will take acreage from cotton in the planting season at hand, especially in the Mid-South.
Neeper, speaking at a gathering sponsored by Bayer CropScience, said since 1972 May soybean futures have never traded above $9 per bushel in February as they were this year.
“I think you are going to see a lot of growers, especially in the Mid-South say ‘I like cotton, but I putting in beans and some corn this year,’” Neeper said.
That pull away from cotton to beans and corn will eventually translate into higher December '04 cotton futures and higher prices for growers who plant cotton.
“New crop prices have to rise if we are going to have a worldwide 100-million-bale crop,” which is what Neeper says is needed to meeting world demand.
Neeper is predicting spring planting time prices of 70 cents to 75 cents per pound and a trading range for December ‘04 of 63 cents to 75 cents per pound until late May and early June.
It could reach 78 cents, but “it takes a whole lot to get through 75 cents — it takes a major weather factor,” he added.
Neeper echoed a familiar theme heard from cotton analysts; expect more volatile cotton prices in the months and perhaps years ahead.
All he had to do was point to the recent price swings that went from 67 cents to 86 cents in 3 weeks; from 86 cents back to 67 shortly thereafter; back to 76; down to 64 and up to 70.
“If you were really smart — and most people were not — you made a lot of money” during that span buying low and selling high, said Neeper. “It has been brutal. A lot of fortunes were made; a lot of fortunes lost. If you broke even, that was something to brag about.”
Playing to imbalance
While China and its terrible 2003 crop coupled with its insatiable cotton consumption were key reasons for those acid-reflux market gyrations, the rest of the world is playing into an overall imbalance between supply and demand.
“If you take China out of the equation and look at world production and consumption, there is a deficit of 9 million bales worldwide between consumption and production,” said Neeper.
Demand for cotton is growing. In four of the last five years, world consumption of cotton has exceeded world production. The results are low carry-over stocks and volatile markets.
China's production is expected to rebound this season, but there is no slowing down its consumption. Neeper expects China's production to increase 13 percent to 14 percent to 28.5 million bales for 2004, but consumption could reach as high as 33 million bales, continuing China's need for imports. China is consuming cotton at the rate of 500,000 bales per month. “There is no stopping them,” said Neeper.
While U.S. acreage may be up this year, Neeper expects production to remain unchanged at about 18.3 million bales. This is because yields likely will be down in Mississippi and the Southeast where 6 of the 11 states in that region booked record yields in 2003.
“I think you will see a 1 million bale decrease in production in those areas,” he said. For the West, Neeper said production will rebound, up by 200,000 bales of upland and 300,000 bales of Pima from a less than stellar 2003 production year.
World production and carryover stocks will provide roughly 100 million bales to mills, and they will need it all because consumption in 2004-05 will be about the same.
“You are not going to increase consumption significantly if you do not have enough cotton to consume,” said Neeper.
Neeper is optimistic about near term cotton prices and consumption because of a worldwide growing economy.
While favorable currency exchange rates, China's need for cotton are other factors propelled American exports to records for two straight years, it is improving economies worldwide that are also fueling this consumption growth. Neeper predicts another record in 2004 at 11.3 million bales, with 3-3.5 million bales going to China.
He expects overall world consumption to grow by 2 percent this season.
The Chinese juggernaut is displacing other textile producing countries, none more dramatically than in the U.S. where mill uses have fallen like a ton of bricks, going from more than 11 million bales to 6.2 million bales in three years.
This is happening in a country, the U.S., which produces 18 million bales and at retail consumes 22 million bales. Neeper said some, but not all of that difference, is U.S. cotton exported and shipped back to this country as textiles.
U.S. mill consumption will fall to 6 million bales next season and hopefully stabilize, thanks to a weaker American dollar and higher efficiencies. “Domestic mills are performing admirable in the face of stiff competition,” he said.