Declining stocks and a (hopefully) recovering economy could bring an uptick in demand for cotton in the new marketing year that began Aug. 1, says Gary Adams, vice president for economics and policy analysis at the National Cotton Council.
“We expect to see global stocks decline further in the 2009 marketing year, with the stocks-to-use ratio in the U.S. tightening a bit more to about 30 percent and the world ratio to about 50 percent,” he said at the joint annual meeting of the Southern Cotton Ginners Association and the Delta Council’s Ginning and Cotton Quality Improvement Committee.
“As we get out a year from now, we’ll be looking at 4 million to 5 million bales of stocks, and we can hope that the market will start to realize this tighter U.S. balance sheet. We’ve seen something of a rally over the past few weeks, despite no bullish fundamental news and no real strengthening in other commodities, so hopefully we’re establishing a support level and setting ourselves up for somewhat stronger prices as we go forward.”
The last year has seen “a substantial contraction” in cotton demand, Adams says. A year ago, we were expecting world mill use of 120 million to 122 million bales; right now, it looks closer to 110 million bales.
“As we go forward, a lot of what occurs in rebuilding cotton demand will depend on what happens in the general economy. I think we can make a case that we’re at least testing the bottom in terms of economic recovery.
“We’ve seen the economy slow in the first and second quarters, but in a couple of months as we get some sense of the third quarter, we’re hopeful that we’ll see some stabilization. We’ve had a bit of a rally in the stock market, with the Dow back above 9000, and that is somewhat encouraging that we’re beginning to see a bit more confidence in the economy. There are also some encouraging signals in the manufacturing and housing sectors.”
A concern continues about consumer spending, which constitutes 70 percent of gross domestic product and has a big impact on overall economic activity, Adams says.
“Consumers remain very nervous, and confidence has been declining over the last couple of months — which indicates recovery could be fairly slow and modest, more of a gradual rebound.
“But, all this points to perhaps a little brighter picture in looking at demand growth for the 2009-10 marketing year compared to 2008-09.”
“One of the things to watch as we try to figure out where cotton prices may be going is what happens in other commodity markets. We’ve backed off the 2008 highs for oil, as well as commodities in general — they’re now at about half of year-ago levels.”
Projections by the Department of Energy are for a slight increase in crude oil prices, Adams says, “But nothing particularly bullish; I think a lot will depend on how quickly demand recovers. If demand strengthens and economic activity increases, we probably will see some upward pressure on oil prices. We don’t see oil returning to historically low prices either, but what it does can influence cotton prices one way or another.”
Another influence on the cotton market is the exchange rate for the dollar, he says. “Some analysts feel the big increase we’ve seen in the money supply in recent months may lead to inflation. But that would likely contribute to a fairly weak dollar, and for an export-oriented commodity such as cotton, that would have a very significant impact on where cotton prices go.
“When the dollar strengthens, we see weakness in cotton prices; when the dollar weakens, we tend to see stronger prices not only for cotton, but other commodities as well.
“Overall, what’s happening in the general economy, other commodity markets, and exchange rates, hopefully will translate to better prices for cotton as we move forward.”
For the marketing year that just ended, USDA figures show 12.8 million bales of all cotton produced in the U.S., Adams notes. Of that, 3.6 million went to domestic mill use and 13.3 million to exports, with ending stocks of 6 million.
“Looking at the 2008 balance sheet, textile mill use was down 1 million bales from the previous year. But on the positive side, exports were much better than we’d have expected six months ago. There was a time in the 2008 marketing year that USDA was forecasting 11.5 million bales, but things became more bullish as the year went along and we exceeded that by almost 2 million bales.
“The biggest influence there was India, which backed out of the export market; increased support prices above world prices, which made them non-competitive in the world market; and put a lot of their cotton into government stocks.
“They haven’t begun to release those stocks yet, so importers have had to look hard at U.S. cotton. While world exports dropped to only 29 million bales for 2008 — 9 million below the previous year — U.S. exports were off only 300,000 bales. So, we actually picked up market share in terms of total trade as a result of India being out of the market.”
The U.S. began the 2008 marketing year with 10 million bales in stocks, Adams says. “We had a lot of cotton on hand, but we’ve now worked stocks down to a much more manageable level.”
For 2009, the USDA is reporting 9.05 million acres of cotton planted in the U.S. The Mid-South is down 201,000 acres from 2008, while corn is up 190,000 acres and soybeans up 410,000 acres.
Weather from now on will be a critical factor in what the market does, Adams says.
“South Texas is contending with a severe drought, while many areas of the Mid-South have had too much rain. Most of the rest of the Cotton Belt looks OK on moisture. The overall crop condition across the belt is about the same as a year ago. A lot depends on what happens from this point forward, whether we get timely rains and a normal to late fall to facilitate harvesting.
“We’re looking for a 13.2 million- to 13.4 million-bale crop. We’ve heard estimates as low as 12.5 million and as high as 13.9 million. There’s still a lot of uncertainty about what will happen in west Texas, which can introduce a lot of volatility in the market.”
Adams says there should be some stabilizing in the U.S. textile industry for the 2009 marketing year, with mill use fairly close to the 2008 level.
“The question is, what will happen with exports? I think the outlook is for us to export fewer bales than in 2008. I don’t think we can anticipate another 13 million-bale year; it probably will be more in the range of 11 million to 11.5 million.
“One consideration is that we’ll have less available cotton for export. With a 13 million-bale crop and 6 million-bale stocks, that’s a total supply of only 19 million bales, compared to 23 million a year ago.”
China, the larger user of U.S. cotton, produced 35 million bales last year; this year, it’ll probably be around 33 million, Adams says.
“Their textile industry is under pressure, and we expect only a modest recovery in 2009. They may be in position to buy a little more cotton. But they closely control their market and they control import quotas. They’re trying to do a balancing act in making cotton available to their textile mills while supporting an internal price to growers at somewhere around 75 cents a pound.
“The question is, who do they buy cotton from?
India has emerged as a significant competitor for U.S. cotton. They only exported about 2 million bales in 2008, but they’ve got a lot of cotton sitting in stocks. At some point, they have the ability to step in and sell that cotton, but my guess is they’ll wait for a price rally. I do think we’ll be seeing more exports by India.
“The big question is whether India can return to a 24 million- to 25 million-bale crop, and that’s a key item to watch in terms of what the market may do.”
Have Mid-South cotton acres finally bottomed?
“Looking at a chart of the ratio of cotton prices to corn and soybean prices, based on prices at planting time, we can see that farmers have been responding to what market signals were telling them in a very decisive, lockstep movement out of cotton into other crops with stronger prices,” Adams says.
“If we look at where the December 2010 contracts for cotton, corn, and soybeans are trading right now, the ratio appears a bit more favorable to cotton next year than it was in 2007, 2008, and 2009.”
What has happened to the corn market?
“When oil prices were $100-plus per barrel and gas prices $4 or more, ethanol plants could pay high prices for corn,” Adams says. “But now, with oil prices less than half of last year’s high and ethanol prices down, they don’t have that same ability to pay.
“If we stay at $60-$70 oil, I think that will tend to dampen corn prices. The demand side just couldn’t sustain that level of prices for corn.
“We’re just now getting a more thorough appreciation of the pressure high corn prices have put on the livestock and dairy sectors. The impact on them has been quite severe; they’ve been chewing through equity, hoping for a recovery, but the expectation is that we’re going to see some liquidation of dairy herds later this year, and that could spill over to the livestock sector.
“Going forward, I don’t see $4.50 for corn as long term sustainable.”
Cottonseed production, based on a projected low around 13 million bales this year, and a normal seed-to-lint turnout ratio, points to 4.4 million to 4.5 million tons of cottonseed, slightly more than 2008, Adams says.
Prices for cottonseed have been in a wide range over the past year — close to $400 a ton for a while, and now in the $200 to $250 range.
“Much of what happens to cottonseed prices will hinge on where corn and soybean prices go. The linkage between these commodities is extremely strong. As grain prices and oilseed prices rally, they tend to pull cottonseed prices along.
“Looking at corn and soybean futures prices for the period ahead, it at least sets up a situation to maintain some strength in cottonseed prices. So much in the outlook for cottonseed depends on where grain and oilseed prices go.”