With China expected to use 36 percent of all cotton produced in the world in the coming years, it's hard for the market to keep focused on fundamentals that are indicating slightly higher prices, according to Robert S. Weil, chairman and CEO, Weil Brothers-Cotton, Inc.
Speaking at the 18th annual Engineering Fiber Selection System Conference in Memphis, Tenn., Weil said USDA and the International Cotton Advisory Council see positive fundamentals for the cotton market — at least on the surface.
Weil pointed out USDA's projected world carryout for July 31, 2005, is 49 million bales versus ICAC's estimate of 48.3 million bales. Projected new crop carryout is 45 million bales for USDA and a little less than 47 million bales for the ICAC.
“Fundamentally, the numbers indicate the market should be up a little bit.”
In May, USDA estimated new crop world cotton production at 107 million bales and consumption at 111 million bales. The ICAC estimated a slightly higher production and estimated consumption at 109 million bales, 2.5 million bales less.
The big question for the coming year “is the overall behavior of Chinese mill buying,” Weil said. “Will it be disciplined as it was this past year or wild like it was in the fall of 2003?”
China will consume at least 36 percent of all cotton produced in the world in the coming years, noted Weil. But the country's growth spurt in textile manufacturing is awkward. For example, the imposition of textile safeguards by the United States “put the Chinese market in disarray. Their overproduction of textiles from a year earlier contributed to their need to flood our market the first four months of this year.”
Weil noted that the ICAC has China producing 5.8 million tons of cotton this year, about 26.7 million bales. “We are about a quarter of a million tons less, at 25.5 million bales. Weil Brothers agrees with the ICAC's assessment of 8.6 million tons (almost 40 million bales) of consumption, although other analysts have predicted as much as 9 million tons (41.4 million bales).”
According to Weil, cotton production will also be up significantly in India, “due to the widespread introduction of transgenic seeds and irrigation. We see a slight decrease in production in central Asia and French West Africa.
“Brazil is only beginning to harvest this year's crop. It was hurt early by too much rain and later by drought. Their crop will be down a little from where we had them earlier in the season. Price will determine how much production there will be in Brazil next year. They are probably the most price-sensitive producers in the world.”
Meanwhile the U.S. crop appears better and could inch over 20 million bales, according to Weil. “We weren't happy with the start of this crop, with the cool planting weather and moisture levels, compared with last year's. If I had been asked to estimate this year's crop last week, it would have been a stretch to guess 19 million bales.
“But rains around Memorial Day were money-makers. We lost some acres in west Texas to hail, but there was a lot of accompanying rain. Many acres will be replanted, and the rains will help those prospects greatly.”
Likewise, in the Mid-South and Southeast, “rain helped the crop, which was beginning to suffer. One of our correspondents in Georgia said that crop was off to one of its best starts ever.
“We now have to assume that yield trends will take an upward bias, and abandonment in west Texas will be low.”
Both USDA and ICAC estimate U.S. cotton consumption at 5.9 million bales. “But we have seen more tentativeness in domestic mill buying this year,” Weil said. “Mills are waiting longer to buy, and it makes sense. There is less pressure to secure cotton. Domestic mills are limited to buying only U.S. cotton over the years. They don't have to fight for it as much, so much of it is going hand-to-mouth.
“At the start of this season, we're seeing a historically weak basis, which reflects the large supply available to mills and the relative inability of some domestic merchants to sell in export markets.”
China's buying behavior is not the only fickle feature of the market. The timing of the apparent retirement of Step 2 payments is also a concern, according to Weil.
“Will it happen in the next few months or later? Congressional action will be the final arbiter. The administration has signaled it wishes to comply with the WTO decision at the earliest possible time, but we should not forget that millions of bales of U.S. cotton have been bought and sold for the coming season with the expectation that Step 2 will continue to be in effect. In the past, Washington has respected existing contracts.
“Another factor in the market is the relative strength of the U.S. dollar. No doubt the strengthening is bearish because the market is going down for some reason.”
Other outside factors include the behavior of index funds. “The largest is Goldman Sachs Commodity Index Funds, which in early June had 0.96 percent of all its funds invested in cotton. As that percentage goes up or down, the immense size of the buying and selling can send the market down up or down 10 cents very quickly.”
Weil noted that certificated stocks are now around 350,000 bales and headed toward 400,000 bales, another element that traditionally weighs on prices.