Gary Adams thinks there's a lot to be said for new beginnings. Adams made his inaugural presentation as the National Cotton Council's new vice president for economics and policy analysis at an American Cotton Producers/Cotton Foundation meeting in Atlanta July 24.
There were some light comments about the dour economic analyses of Adams' predecessor, “Dr. Doom” (Mark Lange, who is now the Council's vice president for policy analysis and program coordination and will become its president and CEO in February).
“I come in starting near the bottom,” said Adams, formerly director of crop program analysis for the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. “You rode prices down with Mark, and, hopefully, they will start back up with me.”
Adams said the outlook he was presenting at the Atlanta meeting was still “a little on the pessimistic side” because of the ongoing problems with net farm income in the U.S. agricultural sector.
USDA's most recent estimates put 2002 net farm income at $40.5 billion, down from $47.9 billion in 2001. Without significant recovery in farm incomes, government payments for the current calendar year are projected to reach $21.7 billion, roughly the same level as the last two years.
“A primary factor contributing to the lower farm income is the decline in livestock and dairy receipts,” said Adams. “In 2001, livestock receipts reached a record $106.4 billion. For 2002, receipts are expected to fall to $99.4 billion. Crop market receipts for 2002 are expected to be virtually unchanged from last year's level.”
He noted that cotton futures prices have strengthened in recent weeks, primarily due to changes in market fundamentals.
“Currently, the world cotton crop is projected at 90 million bales, down 8 million bales from 2001,” said Adams. “Consumption is put at 96.2 million bales. If realized, the combination of the two would bring a significant decline in world stocks.”
Foreign cotton consumption usually exceeds foreign production by 4 million to 8 million bales, he notes, but in 2002, USDA projections indicate the gap between foreign consumption and production could be closer to 11 million bales. “Longer term, this deficit will be key if the United States is to maintain 10 million to 11 million bales of exports.”
A smaller world crop and growth in mill use would lead to a decline in global stocks for the 2002-03 marketing year, which began Aug. 1, said Adams. “If current estimates are realized, it would put stocks at levels reminiscent of the early to mid-1990s, suggesting an opportunity to see improved prices for the coming year.”
U.S. 2002 cotton production is also expected to be down given the projected decline in planted acres from 15.8 million in 2001 to 14.4 million in 2002. USDA's latest estimate puts the U.S. crop at 17.5 million bales, down nearly 3 million bales from 2001.
“Since the release of that July number, it is believed that the cotton crop has only improved,” says Adams. “While there is still a lot of time between now and harvest, current expectations lean toward an 18-million-bale crop.”
The marketing year that ended July 31 saw exports levels not seen since the 1920s and a further contraction in domestic mill use. Mill use fell below 8 million bales while exports are expected to approach 11 million bales, a scenario that is unlikely to change much in 2002-03.
With off-take again expected to exceed production in 2002-03, analysts are projecting that U.S. ending stocks could decline from 2001-02's 7.7 million bales to 6.6 million bales, still a burdensome amount of stocks, according to most experts.
China will again play a key role in the world market outlook. In its July Supply/Demand Report, USDA increased its consumption estimate for Chinese cotton to 25 million bales in July, up almost 1 million bales from its July estimate in 2001.
“The report also surprised the trade by revising historical consumption and stock estimates for China,” Adams noted. “With the exception of 2001-02, consumption was revised lower beginning with 1993-94. Although the changes are small, the ‘newly unused’ cotton was added to ending stocks.
“The cumulative effect on stocks was to add 3.5 million bales by then end of the 2001-02 year. Now, beginning stocks for the 2002-03 marketing year are expected to reach 14 million bales. Current estimates put China's net trade position for the coming marketing year at net importing just over 1 million bales.”
Adams said the market watchers are also keeping a close eye on the crop in India. “There are concerns over the development of the crop in the northern regions and delays in planting in the southern regions. USDA currently puts the crop at 11.5 million bales. It will bear watching but it is still too early to assume any significant crop loss.”
The declines projected in the world cotton stocks have helped December New York cotton futures to approach 50 cents per pound.
“Current markets would put the U.S. season-average farm price at 40 to 44 cents per pound,” he said. “Given normal relationships with the Cotton Outlook A-Index and Adjusted World Price, marketing loan gains would still range between 12 and 16 cents per pound.
“Under most scenarios, the prevailing farm price is likely to remain below the loan rate. If so, the counter-cyclical payment authorized in the new farm bill will be at the maximum level of 13.73 cents per pound.”