What can cotton farmers do to boost prices above 70 cents per pound in 2001? Find a way to increase prices for grains and soybeans, says veteran marketing specialist Carl Anderson.
Given the current outlook, cotton producers could plant about the same acreage for the 2001/02 crop as the 15.5 million they planted this year, says Anderson. Average yields would mean a crop of 19 million bales that would exceed total use of about 18 million.
"With the current farm program provisions of no set aside acreage, the U.S. supply of cotton will likely continue to outpace annual demand," says Anderson, Extension agricultural economist with Texas A&M University.
"It will take higher grain and soybean prices and/or another weather-reduced crop to bring supply into balance with use sufficient to hold prices above 70 cents."
Speaking at the Southern Regional Outlook Conference in Atlanta, Anderson said cotton prices appear to be in an uptrend after two years of steady declines. Since early January, the Cotton Outlook "A" Index has risen from 44 cents to 61 cents.
Although world consumption is expected to total 92 million bales, a record, the level of supply will still be a major influence on the market this harvest season, he said.
Currently, USDA is projecting world production at 87 million bales or 5 million bales short of world mill use. The resulting deficit is expected to draw stocks down to 34.35 million bales or 37.11 percent of total use - the first time the stocks to use ratio has been below 40 percent in three years.
"Whenever we have more than a 40 percent stocks-to-use ratio we have a problem with the A Index falling," said Anderson. "When it has been below 40 percent in the past, the A Index has been above 80 cents. But, we can't hold it below 40 percent because of the increased acreage."
As the A Index drops, he noted, foreign acreage normally drops. With the A up from its earlier low levels, foreign acreage appears to have leveled off. "Those acres will be there to produce more cotton when the A goes above 65 cents."
China supply key The biggest factor in decreasing the foreign supply is the reported reduction in China's cotton carryover from 21 million to around 10 million bales since August 1999.
After the Chinese government announced changes in its procurement prices for cotton last spring, China's farmers reportedly planted 9.2 million acres, a 16 percent decrease from the previous year and the lowest acreage since 1962.
At the same time, China's mill use, which was forecast at 20 million bales for the 1999/2000 marketing year, may instead have risen to 22 million due to the lower procurement prices and a restructuring of China's textile industry.
"As a result of the decreased acreage, China's production is expected to have fallen to 17.5 million bales," says Anderson. "That gap between production and mill use could mean less competition for U.S. producers down the road."
In 1999, China exported 1 million bales for the first time, "and that hurt us," he said. "If they import 500,000 bales, as some now expect, we could see some excitement in our market in March."
Whether the Chinese numbers are accurate is open to debate, says Anderson. Some believe that out of those stocks of 10.3 million bales, 2 million to 3 million bales may not be spinnable. "Some of that cotton has been in storage for three or four years, but they are forcing government mills to use it."
The down side for the U.S. cotton industry is that a significant portion of China's cotton consumption is going to the United States, forcing a slowdown in U.S. mill use.
The latter is making the U.S. cotton price more dependent on the volume of exports, he noted.
"This leaves the U.S. producer mostly a residual supplier to the international market," he said. "Thus, even more volatile price movements and greater market uncertainty can be expected in the future."
Anderson said prices and amounts of U.S. exports will have a tendency to move up and down together. "Therefore, during years of plentiful foreign supplies and low prices, producers cannot depend on exports and trade agreements to be of much support to cotton income."
But, as long as the current farm policy is in place, there's not much guarantee that U.S. cotton prices will move up in times of shortages, he noted. Although world stocks are dropping and the A Index has been rising, U.S. prices have stayed the same or even declined somewhat in recent weeks.
"The problem is that the 2001 acreage is likely to be the same as the 2000," says Anderson. "With Freedom to Farm, producers are going to plant the acreage even if prices are down."
If prices do rise significantly, foreign producers will increase their plantings, stocks will rise and prices will go down. "With the loan deficiency payments that are available to U.S. producers, this may be a case where farmers may be better off with lower prices."
For the 2000/2001 marketing year, foreign production is expected to fall about 14 million bales short of use or slightly more than the 11 million-bale deficit in 1999/2000.
"That is a much greater shortfall than the 3 million to 4 million bales during the 1997 and 1998 crop seasons," he said. "Too, the outlook for the 2001 crop indicates the foreign crop may be some 10 million bales less than consumption."
With the large foreign production deficits for the 2000 and 2001 crops, the potential for U.S. export shipments could be in the 8-million to 9-million-bale range for the 2000 crop year and 7 million to 8 million in the 2001 crop season.
Carryover rise Despite the improved export outlook, some analysts think carryover stocks could rise to 5 million bales by the end of the 2001/2002 marketing year because of the potential for the same acreage as in 2000 and better yields during the 2001 growing season.
"Average yields indicate a 19-million-bale crop that would exceed total use of about 18 million," Anderson noted. "These ballpark estimates point to a stable market in the 62 to 72 cents per pound range for December 2001 futures. The A Index is expected to remain firm around the 65- to 75-cent level.
"If past price movements repeat, then U.S. cotton prices should trend higher for the next several years. Yet, the tendency to plant 15 million or more acres of U.S. cotton will probably dampen any sustained rally to about 70 to 75 cents."