While the recent up-moves in U.S. cotton prices appear to have ended a five-year downward spiral, "this new bull market has proven unsettling to the industry's major players," says USDA Fibers Analyst Carol Skelly, Washington, D.C.
"Foreign mills are not buying, U.S. mills have yet to lock in prices, and farmers are just beginning to hedge their crops," she told members of the Cotton Board at their annual meeting at Coronado, Calif. "All this is causing U.S. merchants to wonder if it's really possible to reach exports of the 8 million bale magnitude that the USDA is projecting."
In addition, she said, "The marketing loan parameters are in a state of flux: U.S. prices are rising faster than the A-Index, which means the POP rate is declining slowly, the Step 2 rate is rising a little faster, and the Step 3 import quota has triggered again."
Three major factors have pushed cotton prices upward, Skelly said.
- Concerns about U.S. and world supplies.
- Strong world demand.
- Uncertainties about policy and trade in China.
Global production and consumption projections for 2000-2001 point to a continuing decline in world stocks, she said, with next July's levels expected to be the lowest in six years, thus "increasing the market's sensitivity to any development that could further reduce world supplies." And, she noted, the market has been factoring in a further reduction in this year's weather-ravaged U.S. crop, with some analysts lopping as much as 1 million bales off the August USDA forecast of 19.2 million.
"World consumption is projected at a record 92.5 million bales," Skelly said, and with strong world economic growth expected to continue, "a return to the long-run average growth rate seems a reasonable assumption at this point."
Although some analysts see China as a net exporter of cotton, she says, "closer examination suggests large net exports are unlikely."
Still, "Uncertainty about China's trade and stocks is clouding the supply-demand picture." The USDA is projecting China's imports and exports a wash at 700,000 bales.
What are the implications of the tightening world cotton situation for U.S. supply and demand? "The chief implication is that the U.S. will provide an unusually large share of world exports," Skelly said.
On the domestic front, "the good news is that U.S. consumers are buying more cotton; the bad news for U.S. spinners is that of the total retail cotton consumption estimate of 21.9 million bale equivalents, domestic mill use is likely to account for just under half. Conversely, the good news for importers is that growth in cotton textile imports and the textile trade deficit continue to increase the import share of the U.S. retail market." The USDA's August cotton mill use estimate was 10.2 million bales.
"The combination of larger production and the recent stronger prices should raise gross market income for the 2000 crop," Skelly said, "but farmers' financial positions may not improve commensurate with the market returns. Recent increases in the A-Index suggest that loan deficiency and marketing loan payments will decline from last year, cutting total programs income from about $2.75 billion to about $1.6 billion.
"Total gross income - including market receipts and contract payments, marketing loss payments, the marketing loan program, and cottonseed support - are projected to be up slightly. But, if we deduct variable production costs to derive net returns per planted acre, we find they are at or slightly below last year's level, even with the emergency assistance. And these estimates do not reflect any further losses due to weather. It should also be kept in mind that the distribution of benefit will not be targeted to those with the greatest crop disasters."
While "further farm legislation is possible in 2001," Skelly noted, discussion of the 2002 Farm Bill will likely begin in earnest following the November elections.
"Policy discussions around Washington have thus far centered on goals of maintaining planting flexibility, support exports, and providing an appropriate income safety net."