“Any way you slice it, the cotton grower is going to put in his pocket 70 cents to 74 cents a pound, base grade,” says economist O. A. Cleveland Jr.
“No matter what happens, when you take the market price and add the loan deficiency payment, the counter-cyclical payment, and direct payments, that's the return you can expect,” he told north Mississippi growers at a Clarksdale, Miss., seminar sponsored by Covenant Bank.
Cleveland, with cottonexperts.com, said if the New York price drops below 72 cents, growers will get more government support, giving them the 70 cents to 74 cents return. “If it were to average above 72 cents cash price, you'd get more than that — but I'm not anticipating that happening.”
Still, he feels, things are shaping up for a fairly strong cotton market, unless growers in the United States and around the world get carried away and plant too many acres this year.
Referring to his information hand-outs, Cleveland noted, “I've got two pages of bullish factors and only one page of bearish factors; I think the market we're looking at today is in a fairly bullish mode and that we're going to take it higher.”
World cotton prices today are “still historically below the cost of production in many countries,” he noted. “If we look at cotton/grain price ratios internationally, they still don't favor cotton as they do grains. I would anticipate the world grain supply-to-use ratio at one of the lowest levels in 25 years, which tends to indicate, looking around the world that we won't plant as much cotton.”
Among Cleveland's bullish factors are:
- World consumption for 2002-03 is exceeding production by 9 million bales. The stocks-to-use ratio is the lowest since 1994-95 for the United States and world. “If you remember, prices in May 1995 were $1 a pound and higher, and the stocks-to-use ratio was the lowest we'd seen. We're now seeing that same situation again. One thing's certain: We're not going to $1 this year. But if we look to 2003-04, the numbers we've put together tell us prices are going to be higher for the crop we're getting ready to put in the ground.”
- Production and delivery problems in a number of countries, with very little white cotton available, has pushed the A-Index price higher, “and we're going to see it even higher still. Demand for white cotton is so strong and there's such a limited supply, this will carry the market higher. As this happens, it will make certificated stocks here in the United States even more attractive.”
- Mills are in a similar situation to 1994-95. “Part of the rally back then was based on the fact that textile mills did a large amount of buying, either futures or for physical delivery. And today, we're seeing a large amount of price fixing by textile mills that must be done between now and July.”
- Consumption outstripping supply in China has potential for them to make large purchases. “In years when they're a large net importer, we seem to see fairly hot cotton markets. This year, China's cotton use will total about 27 million bales and their crop was about 22 million — a 5 million-bale deficit they'll have to pull out of their stocks, which are already down to 9 million bales. That may sound like a lot of cotton, but not when you're consuming 27 million bales. They don't have a lot more they can draw down; they'll have to come to the world export market and that means, by and large this year, they'll have to come to the United States.”
- Higher prices have commodity speculators “sitting there, gnashing their teeth, wanting to go long and put more money into the market. By and large, this is extremely positive.”
- Growers haven't been selling 2002-crop cotton; most of it has gone into the loan. “This has caused an increase in the merchant buying basis; it's not uncommon now for trades to be even the New York price, with premium fibers as much as 400 to 500 points on New York.”
- Growers aren't price-fixing their 2003 crop. “With the POP and LDP uncertainty, there's no reason for them to. There's not going to be much selling of new crop cotton until growers see 65 cents for December, and the deficiency we have in white grades will continue to push the market higher.”
- U.S. cotton export prices are “extremely competitive, so buyers are coming to us. A very important number is the foreign production/consumption gap for 2002-03 — 19 million bales, and that's our potential export market. It won't be that large, but all this says that USDA's 10.8 million-bale export estimate is extremely plausible and that the export outlook is very strong.”
Potentially bearish market influences, Cleveland says, include:
- Failure of U.S. and world economies to recover as anticipated. “Right now, consumers are still interested in buying cotton, but nobody knows what effect this lagging economy will have on consumers in the United States and around the world.”
- Speculators are 43 percent long, and as they take profits, it pulls the market down. “We'd like to see that number get down to at least 36 or 37 percent to get some speculative money back in the market and move it higher.”
- “We may be putting too much dependence on China as a cotton buyer. We're talking about them taking another 600,000 to 700,000 bales between now and July. I don't think this will be a problem, and that they will in fact buy this cotton.”
- Higher prices at planting time will result in more acres in the United States and China. “The Chinese will have in-country incentives to increase their acreage, particularly if we see higher New York prices. One of the principal impediments I see is that if we get prices too high, we will plant too much cotton, and that will keep the market from moving higher.”
- At the end of the 2002-03 year, the United States will still have about 6.3 million bales left in storage. “That's a lot of cotton!” Cleveland says. “Still, there's very little white cotton there, and I think the market will tend to move higher. Certificated stocks have been at a record 450,000 bales and are still around 395,000, but I think we'll see these continue to disappear as time goes on.”
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