A weak dollar is keeping cotton's value very attractive at current price levels, even with world carryover at bearishly high levels, said Memphis cotton merchant Williams B. Dunavant, speaking at the Mid-South Farm and Gin Show.
Dunavant, who announced his retirement in January, said the U.S. cotton crop in 2004 turned out bigger “than I would ever have believed. I never would have known that we would have broken all those records in one year, from coast to coast. Yields were phenomenal. The world had phenomenal yields as well.”
The year was a trying one for the merchant. “It was our first losing year in over 50 years, so I didn't have very much fun. Many American shippers suffered a number of defaults from China, and we're still negotiating our way out of them. But cotton is cheaper and things are looking better.”
Dunavant disagrees slightly with his own economics department projections of a 19.75 million-bale, 2005-06 U.S. crop on a projected 14.25 million acres. “We're going to increase acreage from last year, and they're trying to make me believe we're only producing 19.75 million.
“My projection is 20.5 million bales. We have the subsoil moisture this year for another record yield. I do not see that happening, but I didn't see it last year either. I could miss it by a million bales easy.”
Dunavant again lamented the struggles of the U.S. textile industry. “I've been in the business for a little over 50 years. I grew up selling the domestic textile industry. We sold about 97 percent of our cotton domestically, and the remaining 3 percent went to the export market. Now we sell 75 percent of our cotton into the export market.”
On the other hand, the export market “has saved the U.S. cotton producer,” he said. “Total offtake this year is going to be about 19.55 million bales. We have registered for export slightly over 11 million bales and we still have through July left. So 13 million to 14 million bales of exports is not out of the question.”
World cotton production in 2004 was also mind-boggling, according to Dunavant. “We're going to end up with 116.7 million bales of world production. We have been producing 98 million to 99 million bales. You would think cotton prices would be down on those numbers, but they're not.
“China produced 29 million bales in 2004-05, compared to 22 million bales the year before. India had record production of 16 million bales in 2004, versus 13.8 million bales the year before. Pakistan had record production of 11 million bales in 2004, up from 7 million bales last year. Uzbekistan produced 5 million bales, compared to 4.1 million bales the year before. This how we got to 116 million bales this year. I don't see how it happens again.”
Also keeping prices firm is world consumption, forecast at 106 million bales in 2004-05, up from 98.5 million bales the year before. “China's consumption last year was 32 million bales, and they're going to consume 37 million bales this year. Those are interesting numbers for that country.”
Still, increased world production in 2004 will push world carryover from 35.5 million to 46.2 million bales. “That number is certainly construed as bearish. But the weakness of the dollar has made the relative value of cotton very acceptable at today's price levels. That's the difference from last year.”
The merchant said world production will take a sharp drop of about 12 million bales in 2005-06, while world consumption will increase by 1.7 million bales. “So the balance gets better as we look to the future.”
Under that scenario “world carryover will drop from 46.2 million bales to 43 million bales in 2005-06. USDA said world carryover could be down to 41 million bales because they've got Chinese consumption considerable higher than we have at 41 million bales. China will need just about every quality there is in the world, but they will concentrate on the very top qualities as their first preference.”
Meanwhile, China will decrease cotton production to around 26 million bales this coming season. “That's good news. And we're taking their consumption from 37.5 million bales to 39 million bales next year, meaning they will import between 12 million and 14 million bales. It won't all be U.S. cotton, but we will get our fair share. We'll work carryover down next year, and if the dollar stays weak, that will be a positive.
“May cotton is not going to 44 cents,” the merchant said. “Last year, everything I said was wrong, but write that down. We also have to understand that commodity funds control cotton, soybeans, rice and corn. When those folks want to play, there's no stopping them. They are such a dynamic force, but right now, they are heavily involved on the long side, 32 percent long.”
On the farm program “I want a robust farm bill for U.S. cotton, but I would like for markets to be able to react to supply and demand and not farm programs. The government should protect and defend the American cotton producer, no question. It's the structure I complain about. I want my sons, who are going to take over for me, to trade supply and demand, fundamentals and even technicals, and not have to worry about farm programs.”