Keep an eye on five things listed below, and you might gain some insight about cotton prices over the next two years. But before you get too excited, remember the key word here is might.
Never before has the cotton market been pulled and pushed in so many directions, from such great distances and by factors the market usually has ignored. But Gary Adams, vice president, economics and policy analysis at the National Cotton Council, simplified the mystery of the market into “five factors to watch” at Cotton Incorporated's Engineered Fiber Selection Conference, in Memphis.
Grain and oilseeds markets
With the price of corn headed to between $7 and $8, and the price of soybeans headed toward $16, we could be in for another year of low acreage for cotton in 2009. According to Adams, it could be 2010 before the cotton market starts to realize that prices must rise significantly to attract acreage.
Acreage response outside the United States
Up to now, the United States has been the only country to respond to high soybean and grain prices by reducing cotton acres. It's likely that the world will respond at some point. Indeed, there is some evidence that Turkey could reduce its cotton production by as much as 30 percent for 2008-09. That acreage is going into corn.
According to Adams, when the big producers like China or India start to respond in big ways to higher grain prices, then the market could really get worried. Sooner or later, prices for cotton will have to rise to gain acres.
The weather in Texas
Since about half of the U.S. crop was planted in Texas this season, any kind of weather problem can swing production a million bales one way or the other. What happens in Georgia, which has the second highest cotton acreage in the United States, is also important.
The general economic performance in the United States and the world
With high food and fuel prices, people may not have as much to spend on clothing. There is some evidence that young people are spending less on apparel, with that money now going into their gas tanks and into food purchases.
Projections by the International Monetary Fund project global economic growth of 2 percent to 2.5 percent in 2008-09. That's coming off a period where the growth rate was 3.5 percent to 4 percent. “So there is an expectation for slower global growth from what we've had for at least the next 12 to 14 months,” Adams said.
This could have a negative impact on global cotton mill use, according to Adams. “Between 2004 and 2006, we had a global growth rate in mill use between 5 percent and 10 percent. The latest estimate for 2007 puts mill use at roughly flat. USDA is still calling for 2008 mill use to increase by around 2 percent.”
Other factors not mentioned
These include oil prices, increased risk in the futures markets and investigations of both the cotton futures and oil markets which could change the makeup and behavior of the commodity markets.
While oil prices were at $135 a barrel in early June, there are projections for prices to weaken slightly. “But it seems like that's been the theme for the last year or so, and we keep seeing oil prices go higher. We have to keep an eye on the extent to which that drags the economy.”
Adams noted that an announcement by the Commodity Futures Trading Commission of initiatives into the cotton market regarding the need for greater oversight and transparency “could also affect the markets as that investigation plays out.”
The U.S. cotton market has some short-term issues to work through as well, noted Adams. “On the supply side, there are other commodities trying to pull cotton prices up, versus the demand side trying to hold them down to some level. We're likely to see some upward pressure on cotton prices, but cotton stocks are certainly not tight, at least yet. We're talking about a 10-million bale carryout, just for the United States alone, coming from 2007 and going into 2008. Certainly, we're a year of so away from trying to work through those stocks. That will likely keep a lid on prices.”
Adams also pointed out that safeguards on 34 categories of textile imports into the United States as part of an agreement between the United States and China are set to expire at the end of this calendar year.
“Those 34 categories represent about one-third of all textile imports into the United States. Today, China accounts for 13 percent of the imports in those 34 categories. Countries in the Western Hemisphere account for about 48 percent.
China has the potential to increase its share in those categories. “So when that agreement ends Dec. 31 of this year, it will lead to shifts and different dynamics,” Adams said.