But what would normally be the kiss of death for a bullish cotton market may not prove to be so bearish, according to analysts speaking at USDA’s Agricultural Outlook Forum in Arlington.
“With the A-Index in January, 34 percent higher than in January, 2003, farmers’ price expectations are accordingly higher,” said Leslie Meyer, an agricultural economist with USDA’s Economic Research Service. “Competing crop prices are also higher, particularly soybeans, which will likely limit the global increase in cotton production.
“But a record crop is expected nonetheless, 4.5 million bales above the previous high in 2001/02.” (The cotton marketing year begins Aug. 1 and ends on July 31.)
The USDA forecast, which was prepared by James Johnson, Stephen McDonald and Meyer of ERS and Carol Skelly of the USDA Farm Service Agency, puts 2004/04 world cotton consumption at a record 99 million bales.
As a result of the gap between production and consumption, world ending stocks are expected to rise 4 million bales to 36.8 million or about the same amount as at the end of 2002/03 when cotton prices began rising from their low levels of 2001/02.
As has been said in other reports, most of the cotton world’s attention will be focused on events in China.
The economists say foreign producers, led by China, are expected to account for the entire increase in world production since they don’t anticipate the 2004 U.S. crop to be significantly larger than the 2003.
“China’s prices rose more than world prices during this marketing year to date, but competing crop prices have put in their strongest performance in a number of years,” said Meyer. “Area planted to cotton will undoubtedly increase, but the degree of cotton response to cotton price changes will probably be less than in recent years.”
He said China’s cotton area has changed at about one-half the rate of domestic cotton price changes, which would correspond to a second year of area rising more than 20 percent.
Growers who follow the cotton market closely know that, although China’s acreage rose substantially in 2003, its production fell because of adverse weather conditions on the Northern China Plain.
China’s National Bureau of Statistics recently confirmed its earlier estimate of 2003/2004 cotton output about 22.4 million bales. “This suggests yields fell about 19 percent compared with a year-earlier, corresponding to this year’s unprecedented late-season rainfall in its prime eastern growing regions.”
These developments in China drove the sharp increase in world cotton prices that occurred during the first half of the 2003/04 marketing year, according to Meyer. Because of already limited stocks, the failure of the crop in the North China Plain forced China’s mills onto the world market to make up the shortfall.
USDA is forecasting China’s imports at 7 million bales in 2003/04, more than double last year’s level and more than 20 percent of total world imports. (Another Forum speaker, Gary Taylor of Cargill Cotton, said the import total could be closer to 9 million bales)
Even at this level of imports, internal Chinese cotton prices remain well above world prices. The price of middling 1-1/32nd cotton in China, for example, is the equivalent of $1 per pound.
Meyer will continue to need to rebuild stocks – particularly of higher quality cotton – to offset the decline in its production.
“The consumption-production shortfall for 2004/05 is currently forecast at 3.5 million bales; however, China is currently operating with minimal stocks and will need to rebuild for its mills to operate efficiently,” he said. “Accordingly, China’s imports are forecast at about 5 million bales in 2004/05.”