Cotton prices are poised to quickly run up into the mid-60s on lower U.S. production and news that China is expected to consume an astonishing 51 million bales of cotton in 2006-07 — almost 25 percent of global use and 11 percent higher than last year. According to cotton analysts, any crop problem in major exporting countries could send prices into the 70s.
China's textile growth has continually surpassed the expectations of even the most optimistic forecasters, noted O.A. Cleveland, economist and professor emeritus, Mississippi State University. “We are seeing an explosion in domestic cotton consumption. Over the last five years, everybody, including USDA, has missed the Chinese consumption numbers early in the year. In fact, they have been dreadfully low.”
Cleveland, speaking at the Ag Market Network's May cotton market update, noted, “In four short years China has gone from under 40 million bales in annual consumption to over 50 million bales. The capital investment by Chinese and Western sources into domestic textile mill infrastructure is nothing short of phenomenal. So the 51 million-bale estimate may actually be lower than what we end up with.”
In May, USDA projected a smaller 2006 U.S. cotton crop of 20.7 million bales, along with slightly smaller domestic use and ending stocks. While exports dropped about 500,000 bales, “that's not a particularly significant factor because we're still going to export 17 million to 17.1 million bales,” Cleveland said.
The smaller U.S. crop is due in part to dry conditions in Texas. The state is expected to return to a more normal abandonment of planted acres due to severe dryness. Last year, it had a very low percentage of abandoned acres, along with a good crop.
Cleveland believes that any kind of problem with the U.S. crop resulting in production declines of a million bales or more could result in “some exciting markets.”
The world supply-demand situation “is very favorable to the market based on USDA's outlook, even if it may be a little optimistic on world use of 122 million bales and pessimistic on production of 115 million bales,” added Carl Anderson, Extension specialist emeritus, Texas A&M University.
The bottom line is that world ending stocks should dwindle significantly, “which tends to give the market strong support. Weather could certainly change the situation in Texas and the Delta. If we do have a smaller crop as USDA projects, we will see a strengthening of the market.”
Mike Stevens, with Swiss Financial Services made the outlook from analysts unanimous. “When you look at the supply-demand figures, this market has a good chance to get into the mid-60s. Once you get into some crop problems, then the lid comes off this market.”