The amount of raw cotton the United States has to export this year to keep cotton stocks fairly tight looms as large as the Great Wall of China. Or should we say the great wall of China cotton production?

According to Ed Jernigan, president and CEO of Globecot, Inc., one thing in the way of U.S. cotton export prospects this year is the huge crop the world is expected to produce in 2004-05, including a potential record-breaking crop in China.

“Even though prices have collapsed into the dirt as the season has progressed, the price rally last fall and early this year did lead to increased acreage in many parts of the world, said Jernigan, speaking at the fifth annual Cotton Roundtable at the New York Board of Trade in New York City.

Jernigan forecasts world production of 106 million bales in 2004-05, compared to USDA's July projection of 104.7 million bales. Either figure would be a world record and much more than the world will need.

Jernigan expects world consumption of 100.15 million bales will increase world ending stocks by 4.5 million bales and create tall challenges for U.S. cotton production.

“The mechanism of global world trade and prices has changed dramatically since U.S. cotton consumption has collapsed,” he explained. “Several years ago, the United States consumed 10.5 million bales, produced 18 million bales and had to export 7.5 million bales to stay even. When we exported more than this, stocks tightened and prices rallied.

“Now with domestic consumption forecast next season at 5.5 million bales, if we produce 18 million bales or more, we have to export 12.5 million bales to stay square.”

And to affect prices in a positive way, the United States would have to export even more. Jernigan noted that in 1995-96, “U.S. cotton stocks dropped to 2.6 million bales, but domestic use was above 10.6 million bales, so stocks were only about 26 percent of domestic use.

“Last year, we got excited because stocks dropped to 3.6 million bales. That 3.6 million bales was small, but it was almost 50 percent of domestic cotton use. We will have to get stocks to 1.5 million bales to get where we used to be at 3.6 million bales (in terms of stocks to use).

“The United States has a major burden to export,” Jernigan said. “This hangs over the price in a major way. We have to export almost 14 million bales for stocks to be tight again, and that's something we've never done before.”

On the other hand, Jernigan does expect some volatility in the market, “because China has 35 percent of the world cotton use and 30 percent of the world production. So I'm not married to the bear side.”

Despite government attempts to reel in China's expanding economy, consumption in China is expected to continue at a fast pace, according to Jernigan, who has visited the region three times in the last month. For 2004-05, “we see cotton use in China at 35.35 million bales, with half of that going to domestic demand.”

Meanwhile, cotton use in India is also expected to increase about 5 percent to 14 million bales, up almost 700,000 bales from USDA's estimate. In the rest of Asia outside of China, retail sales “are growing and will increase slightly, driven by demand in Thailand, Indonesia and Vietnam. Meanwhile cotton consumption is slowing in South Korea, Japan and Taiwan.”

Here's more of Jernigan's observations on the major cotton-producing countries outside the United States.

  • China is now the center of the global cotton universe for both consuming and producing cotton. It's the most important component of the supply and demand picture but is often the most misunderstood as well, according to Jernigan.

    Last year, Chinese prices for cotton neared a dollar a pound at mills for higher grades throughout most of the country, although Chinese cotton producers sold their cotton for somewhere around 75 cents per pound.

    At the beginning of this season, China provided incentives for growers to plant more grain, “but it didn't work,” Jernigan said. “The large grain-producing areas in China are north of the cotton belt, so the two crops don't necessarily compete directly.”

    Jernigan noted that in late May, expectations were that China would increase cotton acreage by 10 percent to 12 percent. “The reality is that growers increased acreage more than anyone thought, overall about 16 percent.”

    Jernigan noted that the Xinjiang Province, the largest cotton-producing area of China, increased acreage by 16 percent to 17 percent over last year. The increase “has major implications to total output. The crop is also off to an excellent start and could produce almost 10 million bales of cotton.”

    On the other hand, too much rain is causing some concern in the north China crop. “The next 60 to 90 days will be crucial in China. Last year, during this time, the typhoon season brought in abnormally heavy rains and set off a wet season that hurt the crop.”

    Jernigan is forecasting a Chinese crop of 29 million bales to 31.5 million bales, compared to USDA's forecast of a record 30 million bales. “China will produce 30 percent or more of the world's cotton under this scenario. So you can see how important its role is going to be.”

  • For the last five seasons, India has produced from 10.6 million to 13.2 million bales on the largest cotton acreage in the world. India's internal cotton market appears insulated from international markets, according to Jernigan. “Prices there have actually rallied over the last several months. Growers have been getting good returns on cotton and are excited about it.

    “Planting is still under way in India, and my feeling is we could have the same level of shock at the acreage increase as we did in China. Acreage is up 15.7 percent in the northern zone.”

    The coming monsoon is the big factor for the rain-fed regions of India, source of 80 percent of India's production. The monsoon this year has been very irregular, causing some concern over whether the Indian crop can reach its full potential.

    If a normal monsoon does occur, “Indian production could reach 13 million bales,” according to Jernigan. That's slightly above USDA projections of 12.5 million bales. While dry weather could scale these projections back 2 million bales, perfect weather could result in a crop of nearly 14 million bales.

  • USDA is forecasting an 8.75 million bale crop in Pakistan, “but we don't see that. Growers did increase acreage, but only 7 percent to 8 percent. We have Pakistan at a half million bales below USDA.”

  • Brazil's harvest of its 2003-04 crop, still in progress in July, appears to be on its way to a record. Record exports are also expected. “There is a lot of enthusiasm for the 2004-05 crop. Current prices are 36 cents to 37 cents a pound. But as prices rallied last year, there was a lot of forward contracting for the 2004-05 crop. We have the crop at 6.2 million bales.”

  • “The central Asian crop has gotten off to an excellent start. USDA has the crop at 7.4 million bales, up almost 600,000 bales from last year. We agree with that assessment.”

  • “Last year, the African Franc Zone produced about 4.2 million bales. This year, I think they will produce 4.6 million to 4.7 million bales.”

  • The forecast is for about 2 million bales from Australia, down from USDA expectations.

  • No changes are expected for Greek cotton production, while Turkey cotton production is up slightly.

The Cotton Roundtable is sponsored by Ag Market Network, New York Board of Trade, Certified FiberMax, Cotton Incorporated and Farm Press Publications.


e-mail: erobinson@primediabusiness.com