Anything can happen when you're dealing with a biological process, but most analysts don't expect the world's cotton producers to duplicate their success in the 2004-05 season in 2005-06.
The world's growers surprised everyone last year by producing a record average 650 pounds of lint per acre — 75 pounds of lint per acre more than would have been expected from trendline yields (575 pounds per acre).
The higher average yield and last year's increased acreage combined to produce a crop of 119.6 million bales, according to the USDA's World Agricultural Outlook Board June production estimate. Those 119.6 million bales and the previous year's carryover of 37.3 million bales pushed the world supply to 156.95 million bales.
“I don't believe we will see lightning strike twice,” said Gary Raines, manager, fiber economics, for Cotton Incorporated. “I think we will see world production in 2005-06 return closer to historic trends.”
Speaking at Cotton Incorporated's 18th annual Engineered Fiber Selection System conference in Memphis, Tenn., Raines said cotton prices are about 40 percent below where they were at this time last year.
“That would suggest we could see a dramatic decline in plantings… on the order of about 10 percent,” he noted. “The declines will be rather widespread and not confined to one or two countries.” (China, for example, is expected to reduce its plantings by 12.1 percent.)
Raines said higher oil prices are having a dampening effect on the world economy, which directly impacts demand for textile and apparel products, but have also resulted in higher prices for polyester, which competes with cotton in a number of textile and apparel uses.
“When we compare cotton and polyester prices, we see that in the last year or so there has been a gap between cotton and polyester,” he said. “That has served to promote an even more rapid rate of growth in cotton consumption. In 2005-06, we will see that gap narrowing somewhat, but still persisting. I think that will serve to increase levels of mill consumption worldwide in 2005-06.”
That could mean 2005-06 worldwide mill use of 111.5 million bales, an increase of nearly 3.5 million bales above the USDA estimate of 108 million bales for the 2004-05 marketing year that ends July 31.
With production possibly declining from 119.6 million to 107 million bales and mill use rising from 108 million to 111.5 million bales, world ending stocks should fall by about 4.7 million bales for the 2005-06 marketing year compared to the “burdensome” 2004-05 48.7 million bales.
The 2005-06 stocks-to-use ratio, a barometer of future price trends, should also be on the decline, dropping to 40.5 percent, 5 percentage points lower than the level forecast by USDA for the current marketing year.
Normally, growers could expect higher prices following a decline in the stocks-to-use ratio, and prices may strengthen somewhat in the months ahead, Raines said.
“I don't think the strengthening of prices will be commensurate with the tightening of the stocks-to-use ratio,” he said, “particularly because prices already have a head start with the increases we've seen in the last couple of months.”
He said trendlines based on historical price and stocks-to-use ratios point to prices in a band between 48 and 52 cents per pound on the A Index for the next several months. “If you look at where prices are now (52.85 cents on June 6), then we're well within that band now.
“So we may see the stocks-to-use ratio continue to tighten, but prices may not rise much more than they have.”
U.S. cotton acres are expected to be flat to slightly higher in 2005 with both yields and abandonment expected to return to more normal levels after the 2004 record 855-pound national yield average and unusually low abandonment.
“No one saw that 855-pound yield coming last year, and it's possible we could be surprised again,” said Raines. “But the U.S. crop does not appear to be off to as good a start in 2005 as it was in 2004 at this time.”
As a result, U.S. production could drop back under 20 million bales to 19.5 million, which would be a significant decrease from 23.25 million bales in 2004.