Even though the world is using more cotton than it's producing, the question of when cotton prices rise and by how much is a hard one to answer, according to the National Cotton Council's chief economist.
“We're still seeing quite a bit of price pressure out there,” said Gary Adams, NCC's vice president for economics and policy analysis. “And a lot of that has to do with the fact that we're still going to see a fairly large crop from this year's U.S. harvest, although it's been a fairly wet fall.”
Another factor hanging over the market is the large holdover of U.S. stocks from last year, approximately 7.5 million bales.
Adams says that unless the market “gets surprised about the size of this year's U.S. crop,” large supplies will keep pressure on prices working into harvest and into next spring.”
The market will continue to trade on USDA's October estimate of an 18.1 million-bale U.S. cotton crop in 2002.
As to USDA sticking to this forecast next month despite the losses that Mid-South and Southeast cotton have taken from excessive rain this fall, Adams noted. “It could be that the Mid-South crop was higher than USDA estimated back in September. Now with the losses, USDA's current estimates may be actually be fairly accurate.”
U.S. growers won't be selling as much cotton into the domestic textile industry as in year's past. But the industry has stabilized somewhat, according to Adams, and domestic consumption could remain steady at around 7 million to 8 million bales.
Meanwhile, exports of raw cotton have increased by the same amount that domestic consumption has decreased. This, too, can have some impact on the domestic price equation, noted Adams.
“When you rely on the export market, it forces the United States to be very competitive with the quotes and bids coming in from other countries. So the percentage (of domestic use to exports) probably does factor into the price situation in the United States and contributes somewhat to the overall price situation that we're in now.”
There is a good possibility for continuing strong exports, according to Adams. “One of the indicators is foreign production and consumption of cotton. There is a deficit out there — more cotton is being consumed than is being produced. So they are going to have to look somewhere to get cotton, and the United States is in a position to supply it.
Other factors for a strong export market include demand from Mexico, Turkey, Pakistan and India. “And if we could see China pick up its imports, all that would set the stage for maintaining a 10 million- to 11 million-bale export figure.”
Adams noted that China's domestic demand continues to remain fairly strong, somewhere in the area of 25 million to 26 million bales. Estimates are that this year's Chinese crop is going to be somewhere around 22 million bales.
The deficit in Chinese production suggests that China will import some cotton and further draw down its stocks. “The market will watch how China's imports shape up as we go through the marketing year,” Adams said. “We are continuing to have issues with China about how they are implementing their tariff rate quotas under WTO.”
While China appears reluctant to buy cotton, “if you look at their internal demand situation, we're seeing supplies tighten up a lot. I don't know how long into the future they can draw down stocks.”
Another factor that could hurt cotton consumption in the world is the continued growth of man-made fiber, Adams said. “We have seen man-made fiber production increase at almost an exponential rate the last four or five years.”
The good news for prices is that that world stocks will draw down this year by 6 million bales.
“So we are seeing the market tightening up and moving in the right direction,” Adams said. “Once we get through harvest, maybe that starts to translate into some better prices.”
As the 2003 planting season rolls around, there will finally be legitimate competition for acres. “The grain markets are going to provide the strongest competition for acreage, more so than soybeans,” Adams said. “By the time we get into next spring, South America may have already taken a lot of the appeal out of soybean prices.”
The hope is that grain crops will pull on the cotton market. But Adams stresses that uncertainty will be a part of this market for a while.
“Stocks will play an important role. There's a lot of difference between having 4 million bales of cotton stocks going into planting and 6 million or 7 million bales.
“There are a lot of signals pointing to a turnaround in the cotton market,” Adams said, “but when all the fundamentals converge and at what price level is hard to say.”