Chinese consumption, long funds, strong demand and high oil prices are providing plenty of buoyancy for the cotton market as the season approaches. But there are many potential downers looming in the months ahead, according to three market analysts speaking at an Ag Market Network teleconference on the cotton market in March.
These include the effect of budget restraints on the farm bill, an excess of exportable world supply and the potential for another huge world crop.
According to O.A. Cleveland, economist and professor emeritus, Mississippi State University, China is using more and more cotton, but has announced that it will reduce imports and use more cotton out of storage.
“USDA indicated that China would draw down stocks an additional 1 million bales from (February). That caught us off guard, and I'm still having trouble accepting that.”
He said local Chinese prices for the equivalent of the May contract are around 78 cents a pound, 25-cents higher than the U.S. price. “U.S. cotton would ship to China at a little over 60 cents a pound. That would still be a significant difference.”
Cleveland added that if Chinese stocks were reduced another million bales, “that would drop them down to a 66-day carryover at the end of the year. That would be a substantial change in the market situation.”
Cleveland said any new crop production difficulties in the United States or in China would skyrocket the market.
In the meantime, “We're going to have to pay particular attention to our exports to China. We are certainly on track to move 13.2 million bales. We've been selling 50,000 bales to 120,000 bales every week.”
USDA projects Chinese consumption for 2004-05 at around 37.5 million bales, noted Cleveland. “But there is reason to believe that consumption could be 38.5 million to 39 million bales.”
Cotton is also getting a boost from high chemical fiber prices due to high oil prices, noted Cleveland. “The price spread between an all-cotton, boy's T-shirt compared to one with a 50-50 blend is about $2.15 per shirt higher from a year ago, with the all-cotton shirt now below the cost of the blend. This is a clear indicator for increased demand for cotton, and we should see this continue.”
Cleveland doesn't expect a significant change in U.S. carryover estimates of 7.1 million bales next year. “But we will draw down world supplies by 3 million bales. The attitude toward cotton prices is positive. That doesn't mean they're getting ready to take off. It means there is support in the market for December.”
Cleveland believes December will trade from 59 cents to 64 cents on the high side and 47 cents to 50 cents on the bottom. “Carryover is going to remain a burden, but China will be a heavy buyer and will support the market. If we see Chinese crop problems, we could see prices move higher.”
According to Texas A&M Extension economist Carl Anderson, U.S. cotton plantings will slip over 14 million acres in 2005, a little higher than USDA's estimate of 13.8 million acres. He disagrees with USDA's forecast for lower Texas acres. “I haven't talked to any producers in Lubbock who say they are going to plant less cotton than last year. So I'm going with last year's acreage for Texas.”
Anderson said the world trade surplus and the potential for another huge world crop are troublesome for the market. “Carryover in the major exporting countries will be the largest since 2001, when the A Index dropped to 30 cents to 40 cents and December 2001 futures dropped to 28 cents.
“I don't think we're headed to those low levels, but we do have pipelines full of cotton. We have a world stocks-to-use ratio of about 44 percent. Historically, any carryover larger than 40 percent weighs heavily on the market.”
Anderson believes the world cotton crop could be another big one in 2005-06, possibly around 109 million bales with a world use of 108 million bales.
“How much China consumes and produces will play a big part in how far this market moves. India is also a sleeping giant. They have the acres and their genetically modified seed has increased their yields by 50 percent. We have a lot of potential there and in Brazil and Australia.”
“Keep an eye on the funds,” Anderson said. “They turned bullish Jan. 7. So they've been net long (now about 3.8 million bales) for three months. It's been a good support under our market, along with strong demand and the weakening dollar in the world.
“But one day they're going to start selling. There's no way to figure out when they're going to turn, but it's very clear that when they start collecting profits, it's going to take this market down 3 cents to 5 cents, and that's going to take the edge off the opportunities to price this crop in the mid-50 cent range.
“Any move over 60 cents is a pricing opportunity,” said Anderson.
There are unknowns the market must work through as well, according to Mike Stevens, Swiss Financial Services. “We have a huge influx of money from the funds — we've never had open interest like this. We also don't know how the WTO or budget restraints in regard to the farm bill are going to play out.
“We're also concerned about the trade flap between the administration and China. That does not bode well.
“It's a little easier to be bearish right now than bullish,” Stevens said. “But every time this market has dropped, it's popped back up. If we get above 55 cents, it could trigger some big Chinese buying that could give us a run. But we should be careful about being bullish in July. We still have 7 million bales to move forward.”