Who's more responsible for low cotton prices? U.S. farmers and their subsidies or Brazilian producers who plant more acres with no discernible market for them?
An irony of the current world supply/demand situation is that one country holds an unusually high percentage of world stocks, and, no, those stocks are not in the United States.
In fact, despite all the finger-pointing at U.S. farm programs by the Brazilian government, Oxfam and environmental groups, world cotton stocks are expected to be low in every cotton-producing country except one: Brazil.
“A lot has been made this year by the expectations of low world stocks, whether in China, the United States or just about anyplace… except Brazil,” said Calcot's Jarral Neeper, an agricultural economist writing in the cottonexperts.com Marketing Weekly column.
Neeper says USDA estimates 2003-04 world cotton ending stocks at 32.7 million bales, the lowest since 1994. The resulting stocks-to-use ratio of 33.4 percent is also the lowest since that year.
“However, Brazilian stocks, estimated by USDA at 4.3 million bales, churn out a stocks-to-use ratio of 88 percent,” he says. “Another look at the Brazilian stocks reveals a 13 percent share of total ending world stocks… a huge number considering that local Brazilian consumption is only 3.8 percent of the world.”
Brazil's stocks aren't the sole reason for weak world prices, of course. Predictions of increased 2004 plantings in China and China's attempts to slow its rampant economic growth are the primary cause.
But it's interesting that a country that has made an international case of the United States' rather modest subsidies should do such poor market planning that it has more than a year's crop sitting in warehouses.
Part of the problem, Neeper points out, is the lack of infrastructure for moving the crop from the cotton-producing regions to the ports. Reports indicate Brazil's highway system remains poor despite years of government promises to improve it.
“No doubt the government is working feverishly to fix that problem (so much for U.S. producer subsidies), but still it won't be enough to insure a smooth flow of goods, at least for the near future,” he says. “The result: To entice buyers to take a chance on timely delivery of goods, prices have to be very, very attractive.
“Given the massive buildup of stocks in that country with the only outlet being the export market, Brazil will continue to pressure international prices for some time.”
We could go into the Brazilian government's low interest farm loans and export subsidies and the other schemes it uses to subsidize its agriculture, but we expect the WTO will hear about those when the United States appeals the latter's ruling against the U.S. cotton program.
Some experts are predicting U.S. cotton plantings may have dropped to as low as 13 million acres this spring because of relatively higher corn and soybean prices. It will be interesting to see how Brazilian farmers respond when they begin planting in September and October.