The pace of the economic recovery, India’s decision on exports, China’s actions on rebuilding reserves and the relation of cotton price and profit potential to competing crops all weigh on markets going into fall and winter and on 2011 planting decisions.
But so far, so good, says Gary Adams, vice president for economic and policy analysis for the National Cotton Council.
“The situation now is far different from recent years,” Adams said at the American Cotton Producers/Cotton Foundation joint meeting in Lubbock, Texas. “Optimism has steadily increased since late 2009,” Adams said.
He said October futures were trading in the 87 cents per pound range. “The Far East index has been in line as well.” He said December 2010 futures made runs at 80 cents several times during the year but would back off into the 70s. Until recently. “The last few weeks December has been in the 83 cents range.”
Stocks, he said, have been “tighter than anticipated. China stocks are also tight.”
He said China cotton stocks may be lower than USDA estimates.
U.S. stocks have been whittled down over the past three years. Concerns over the China stocks and Pakistan’s 2010 crop also contribute to optimism.
Adams said a 10 million-bale U.S. cotton stock level in 2007 has been trimmed to 3 million coming out of 2009. “We are in a much different position in 2010. Warehouses may not be completely empty but those 3 million bales are spoken for.”
He said 480,000 bales remain in the marketing loan and about 19,000 are certificated, down from 1 million bales, and “one of the lowest levels on record. But we could see some erratic behavior by October.”
He said the low stocks cannot be made up soon. “It will take three to three-and-a-half months for the Northern Hemisphere 2010 crop to move into the market,” he said. “So we have a tight market going into 2010 harvest.”
And there may not be enough production to fill the gap. Recent flooding in Pakistan could reduce the world’s fourth largest cotton producer’s crop by as much as 30 percent. “Pakistan is a net importer of cotton so there is the potential for Pakistan to import more cotton.”
He said India will see a substantial increase in production but their export activity is a question. Currently, India has an export ban, which followed an export tax. “We have questions about what India will do. If they are in the market they will be competitive,” Adams said. India typically undercuts U.S. cotton prices.
“But how aggressive with they be? The USDA assumption is they will resume exports Oct. 1 without an export tax.”
That assumption would put India exports at 6 million to 6.5 million bales, similar to 2009. But Adams says 4 million to 5 million may be a more likely export cap.
He said China has depleted its cotton reserves by some 15 million bales in the last 14 to 15 months. “A big question is how much they have left in reserves. We don’t think it can be much. So when do they start rebuilding reserves? Now, they have no flexibility.”
He said China likely will need to import cotton for domestic use and to build reserves. “They have a tight supply situation but will look for opportunities to import.”
He said internationally, cotton is deficit some 17 million bales. “The United States anticipates exports of 15 million bales.”
Exports are off to a good start, he said. “Carryover sales from 2009 and orders not shipped put exports just shy of 6 million bales on the books. That’s the most business on the books at this time of year ever. We’re off to a good start and exports look strong into the fall.”
He said the 2010 U.S. crop is off to a promising start. Early NASS estimates put the crop at 65 percent good to excellent. Some weather problems in late July and early August lowered expectations but still remains at 62 percent good to excellent.
“Abandonment is low, 2.5 percent across the belt. That rivals 2004 and 2007.”
USDA estimates call for an 18.5 million bale crop. “We have the potential to go either way,” Adams said. “With a good rain for much of the Cotton Belt the yield could be exceptional. But challenges remain.”
He said the U.S. and world economy is a concern. “The economic recovery needs to continue,” he said.