“The world stocks-to-use ratio is very low, world stocks are low and U.S. mills have major price fixation to do in April and May,” said Cleveland, professor emeritus, Mississippi State University, speaking at the 2003 Mid-South Farm and Gin Show in Memphis.
All three fundamentals existed in 1994/95, “and we drove prices to $1.17,” Cleveland noted. “My most accurate price prediction I can give you is that it will not go above a dollar, or even 80 cents. There is too much cotton in the United States. We have about double the stocks we had back then. That’s the one big difference.”
Still, Cleveland is very bullish on cotton. “We had the largest one year drop in world cotton production in history, from 98 million bales year before last to 87 million bales this past year. That’s been the basis for the higher prices and why we should continue to see high prices down the road. ”
Meanwhile, world consumption continues to rise, especially in China, India, Pakistan and Turkey. “Actually, 60 percent of the world’s consumption is in China and those countries.”
The explosion in consumption has brought world-ending stocks down to very low levels, noted Cleveland. “World ending stocks as of July 31, 2003, will be below 40 million bales. That’s the first time in seven crops that we’ve had world ending stocks fall that low.”
Cleveland said world-ending stocks could slip as low as 34 million bales by 2003-04. “Ending stocks has an almost inverse relationship to price. As we see the ending stocks go down, we should expect to see cotton prices move higher.”
The low stocks also mean the lowest world stocks-to-use ratio since 1994-95, “and we had some fairly handsome prices in the spring of 1995.”
Cleveland expects an 18.1-million-bale U.S. cotton crop in 2003-04. That’s a little larger than cotton merchant William B. Dunavant Jr. projected during his presentation at the Gin Show. The larger forecast was based on a higher acreage forecast of 14.5 million acres.
U.S. cotton acreage forecasts have inched higher since the National Cotton Council’s report earlier in the year of 14.1 million acres, noted Cleveland. “We have seen significant changes in price ratios between cotton and corn/soybeans since the survey. That suggests that there will be more ground going into cotton.”
In addition, weather forecasters “are telling us that we are going to have a wet spring in the Mid-South. That suggests to me that we are not going to get all our intended corn acreage planted. That acreage tends to go more to cotton than to beans.”
The price relationship is also leading to more cotton acreage in the world, including an expected 12 percent to 17 percent increase in Chinese acreage.
“That’s a lot of ground in China. But even though their acreage is going up, they’re still going to need more cotton.”
Cleveland projects U.S. mill consumption for the coming season at around at 7.6 million bales. Chinese consumption will rise to 28.5 million bales in 2003-04, a million bale increase over the current season “which translates into demand for U.S. exports.”
The price outlook for cotton “depends on how well we judge the situation in China,” Cleveland said. “Consumption is beginning to out pace production in that country and that tells us that they are going to continue to need U.S. cotton.”
Cleveland expects July futures prices to range between 62 cents and 67 cents. “Certainly the supply/demand numbers help support that.”
Mill fixations, or the cotton (old crop) that textile mills still need to buy, could also play a role in keeping cotton prices high between now and planting.
“Mills fix prices by buying cotton futures,” Cleveland explained. “And there is a tremendous amount of buying that must be done. They’ve discovered that they can’t expect prices to get back down to 54 to 56 cents in May. So they’re buying futures now, and it’s pushing May up to life of contract highs.
“Based on this, December projects to about 65 cents, with a range of between 63 cents and 68 cents. So maybe we should start thinking about hedging on a very small quantity of our crop at the 62-cent level.
“The rally should last well into the planting season based on the fact that the May-July is going to continue to rise higher based on demand for high quality cotton, which seems to be absent here and around the world right now,” Cleveland said.
On the downside, given a higher acreage forecast and a good growing season “I can see this market selling back down to 55 cents to 60 cents on the bottom.”
Foreign textile mills will be looking for a high-quality cotton early this harvest season, according to Cleveland, “in September or very early October and they’re willing to pay a premium for it. It’s going to have to have a staple of 1-1/8-inch, a strength of 30 and above.
“So whatever variety you think can get you an early harvest with those qualities, the market is indicating that it will pay more for it.”
Certificated stocks of roughly 380,000 bales will remain a problem, according to Cleveland. “That number is a near-record high. We’re seeing strict low middling, 1-1/16 go to ‘cert’ stocks. That’s telling us that the ‘perfect cow’ that so many of us grew up with, strict low middling, 1-1/16, is no longer the ‘perfect cow.’ In fact, it is a discount piece of cotton.
“It’s this quality of cotton that goes to the board and acts as a weight over the board. The market is telling us that it wants something of higher quality than the strict low middling 1-1/16.”