Adequate world supplies are keeping cotton buyers happy and pressuring prices despite very strong demand, especially from China, which expects to import 18 million to 19 million bales of cotton in the coming year, according to Texas A&M professor and Extension specialist emeritus Carl Anderson.
“The supply of cotton in the world is adequate, that is stocks are neither abundant, nor or they scarce,” said Anderson, speaking on the Ag Market Network's April teleconference and radio broadcast.
“Market trading the mid-50-cent range and taking a dip every once in a while toward 53 cents is a clear indicator that no one in the world on the buying side of cotton is worried about supply.” One reason for the sluggishness is the record crop — an estimated nearly 24 million bales — produced in the United States last year.
Even with an extremely strong export estimate by USDA at 17 million bales and domestic use of a little less than 6 million bales, “the bottom line is that we are building stocks a million bales from last year.
“That puts us at a 6.5 million bale carryover, which is a full load. We have a very satisfied market here in the United States and we have almost 7 million bales still hung up in the loan,” Anderson said.
“It's got to come out over the next several months. But the market relationships of world prices, New York futures and adjusted world price does not allow for the stronger equity payments.
“Since February, we have seen equity payments back off and cotton is not moving out of the loan. But the market knows and we all know, that it's going to have to come out.”
Anderson said that as of April 12, “speculators are holding the equivalent of about 14 million bales. Half are long and half are short. They're straddling the market. It makes an interesting new background for our markets from the technical or speculative side.”
Given the 14.6 million planted acres estimate, U.S. cotton producers should produce a crop of around 22 million bales, according to Anderson, “even if we lose a couple of million bales in Texas. The Southeast and Mid-South have good moisture conditions.
Also a third of our Texas acreage is irrigated, including several hundred thousand acres that are drip irrigated.”
The market will surely be affected by weather scares, “that could bring December '06 above 60 cents and as high as 64 cents, given the supply-demand numbers we're looking at. Typically, it's too dry in west Texas and too wet in the Delta.”
Anderson warns producers to keep both sides of the world market in mind. “If you have a 53 million bale carryover and you only draw it down 3 million bales, it really doesn't do a whole lot to tighten up supply. If we have some disastrous weather and bring the world crop down 5 million or 6 million bales below use, then we have one heck of a rally coming up toward 70 cents. On the other hand, what if the world comes in at 3 million bales above use. Then we're headed down to 52 cents to 57 cents on futures.
Anderson noted that China is expected to increase its cotton acreage by 10 percent to 12 percent for 2006-07. “That would produce a crop of around 30 million bales. We expect them to use 48 million to 49 million bales. So that still leaves an 18 million to 19 million bale gap between foreign production and consumption. That leaves the United States a chance to head back toward 16.5 million to 17 million bales in exports the coming year. Domestic use will have a setback because of the loss of Step 2 and will drop to less than 6 million bales.”
As to farm policy, Anderson noted, “anything that lowers the current safety net is quite detrimental to the financial integrity of our cotton farms and grain farms. We want to hold the current safety net, especially with costs skyrocketing and energy costs.”