I think the honeymoon is over,” Gary Adams says of cotton prices that have fallen from the 70 cent area in March to around 45 cents in August.
Some of the factors driving market mentality for the 20 cent-plus drop in the December futures contract, he told members of the Cotton Foundation and the American Cotton Producers Association at their joint meeting at Albuquerque, N.M., include:
A general consensus that the world crop will be at a record level, somewhere between 100 million and 105 million bales.
“Much of this is being driven by foreign acreage quite a bit higher than last year,” says Adams, vice president of economic analysis for the National Cotton Council. “In fact, going back three or four decades, this would be a record level for cotton acres outside the United States — up 8 percent from a year ago to 75.3 million.
“This is obviously one of the things weighing on the market.”
Optimistic forecasts for the U.S. crop. “USDA's report for the first week in August showed 70 percent of the crop in the good to excellent category, and that is also weighing on the market.
China. The 800-pound gorilla in terms of influence on world cotton prices, hasn't been throwing much weight around of late.
“In September-October, we saw them coming into the market with big purchases — one week more than 1 million bales — and even after the first of the year we saw a 200,000- to 300,000-bale purchase, with a total of just under 5 million bales for the 2003 marketing year.”
But recently, Adams says, most of the business out of China “has been cancellations, and information is circulating that they were in default on roughly 200,000 bales.
“This also has influenced the current price picture.”
Comparing a 2001 chart of the December futures contract with the same contract this year shows “some similarities,” he notes.
Even though demand now is stronger than in 2001, the economy is generally performing better, and other commodity prices aren't as low as in '01, “the market tone is one of bearishness,” he says.
For the 2004 marketing year, data point to a U.S. retail market somewhere around 22 million bale equivalents for cotton textile products and apparel, much of which is filled by imported products.
“In 2002, we're probably going to see 1 million to 2 million bale equivalents in the domestic dirt-to-shirt sector, with the remaining 19 million to 20 million bales from imported products. Probably 45 percent of that will be U.S. cotton that has been processed and is coming back as retail products.
“But this just shows that mill use in the United States is declining even further this marketing year, which will include the first half of calendar 2005, when we'll be in a quota-elimination environment. That will continue to pressure the market.
“I think 5.7 million to 5.8 million bales is a reasonable figure for mill use in the 2004 marketing year; that's down from 6.3 million in 2003.”
With increasing amounts of U.S. cotton going to the export market in recent years, Adams says, that situation “is not likely to change” for 2004.
China, the largest buyer, “will probably have the greatest influence on where prices will go as we head into this marketing year.”
Some estimates peg the Chinese crop at 30 million to 31 million bales, Adams says. “We're starting to hear a bit more talk that 31 million is on the optimistic side. We'll have to wait and see how their weather cooperates. We know they increased acreage 12 percent to 13 percent, which would give them a record crop.”
China's mill use is forecast around 34 million bales, up from 31 million previously, but he says “there is increasing uncertainty about how well their mills are doing and some concern about restricted credit limiting some of their ability to purchase cotton. On the other hand, we hear reports that the U.S. government may take steps to address some of those issues.
“We still expect China to be a significant net importer of cotton, though not to the extent of 2003. We think something in the range of 5 million to 6 million bales is a reasonable level.”
If data are to be trusted, Adams says, China's cotton stocks were at “a very tight level” in the 2003 marketing year, and “there is some discussion that they'd like to shoot for a level closer to 10 million bales.
“To the extent we see purchases to rebuild stocks, this could also contribute to their import levels and can be a driving factor in terms of 2004 price.”