One, why are cotton prices so high? Two, why isn’t U.S. cotton policy driving down prices and forcing foreign producers to the poor house like the New York Times said it would? And third, what will keep prices up?

The answers: China, China and uh, you guessed it, China.

“The Chinese crop appears to not be as big as was expected back in the summer,” said Gary Adams, vice president for economics and policy analysis at the Memphis-based National Cotton Council. “Given their expected mill use and the tightness of stocks, they are going to have to buy off the world market.

“We have further confirmation of that this morning with a report that China bought 1.2 million bales of U.S. cotton last week,” Adams said. “The week before that, they had purchased close to 500,000 bales. That’s the indicator that the market is using right now.”

There is also a great deal of uncertainty about cotton production in Pakistan and Australia, which is also a positive for prices, according to Adams.

He says 80-cent cotton also reinforces a message that the National Cotton Council has been trying to communicate to the consumer media, which has been highly critical of U.S. farm policy:

“The U.S. farm program is not out there driving the world cotton market. The farm program mechanisms are just set up to react to whether the market is driving the prices higher or lower.

“We haven’t really seen U.S. farm policy change in any meaningful way in terms of its incentives to production through the low prices of a couple of years ago to the high prices we’re seeing today,” he noted. “It’s not the programs that the United States has in place that drive cotton prices, it’s market fundamentals.”

Namely China. “They are the world’s largest consumer and producer of raw cotton,” Adams said. “The market takes notice of what happens there.”

For now, futures prices are holding strong through July 2004 (84 cents). As the market looks farther out, the price breaks to the 70-cent level for December 2004. “Still, that’s a higher level than what producers have been seeing for a while and offer a good marketing opportunity for the 2004 crop,” Adams noted.

Longer term, higher cotton prices will certainly attract acreage back into cotton on a global basis, according to Adams. And high cotton prices could decrease cotton demand in favor of polyester.

“We’re continuing to see demand and consumption hold up fairly well,” Adams said. “That’s been a positive. The real question is whether demand can continue to hold this pace in the face of these prices. China is out there buying, but once they stop buying, things could get conservative.”

e-mail: erobinson@primediabusiness.com