Potential for higher prices 'still there'

Don Shurley, Extension economist at the University of Georgia in Tipton, believes cotton prices could improve substantially in the next few weeks, providing much needed pricing opportunities for growers.

“We have every reason to believe the market is poised to make another run,” Shurley says. “The size and condition of this year's U. S. crop has, in my opinion, not yet been fully factored into the prices we are seeing.”

How high cotton prices rise, he says, depends greatly on planted acreage numbers from USDA at month’s end, and increasing concerns over the condition of the Mid-South and Texas cotton crops.

“We haven’t been able to maintain prices at the 60-cent level in at least two years, and we’re coming off of a year where we had prices at 15-year lows,” Shurley says. “And while the market did hit 63 cents several weeks ago, it only stayed there for a short time.”

Because of that, the 60-cent mark has become a psychological barrier of sorts to the cotton market.

When, and if, December cotton futures break 60-cents, Shurley advises growers to be poised to take action. “Keeping yield risk in mind, it’s not too far out for growers to book at least one-third of their crop if December cotton futures pass the 60-cent mark. Then, be prepared to either re-own your crop with calls in case the market moves higher, or simply purchase put options if the market moves over 60 cents,” he says.

At current price levels, he says, any loan deficiency payment or POP payment on the 2003 crop will likely be minimal. Counter cyclical payments, which he expects will fall somewhere between 8 to 10 cents per pound for the 2003 crop, will be mostly impacted by market prices during the November-February period.

Based on the size and condition of this year’s crop, Shurley firmly believes that U.S. cotton prices should be higher than they are now.

“USDA has projected the 2003 U.S. cotton crop at 17.2 million bales, but there’s a growing realization that it’s just not there,” he said. “We’re probably going to be at least one half of a million bales short of that. In addition, USDA has a pretty optimistic export number of 11.5 million bales built into its projections.

“If this is realized, we could reduce our ending stocks to 4.5 million bales. That’s the lowest level since 2000 and the smallest U.S. stocks-to-use ratio since 1999. And while U.S. stocks are certainly headed down, foreign stocks are also tightening up.”

Any substantial increase in cotton prices, however, could affect export numbers, Shurley says.

“There is still some potential give and take in the market. If cotton prices reach the mid-60s, we could see some decrease in buying by exporters, which could have a limiting effect on the market.”

Another dominating factor in the cotton market, he says, is the phenomenal growth in the world demand for cotton, with record-setting demand in each of the past three to four years.

Although the U.S. textile industry has declined greatly, expansion in China and other foreign countries has been tremendous, leading to much higher U.S. exports, he says. “The gap between foreign production and mill use has been widening and the United States has been able to fill that void.”

USDA is projecting foreign demand for cotton to be about 92 million bales in 2003. This is a little more than 1 million bales higher than last year and about 5 million bales more than two years ago.

“There is no doubt that U.S. exports are another key to the 2003 price outlook, and this worries me that perhaps USDA estimates are optimistic. The worldwide demand for cotton, while at record levels, has no doubt slowed and foreign production is expected to increase by about 8 million bales from last year's level. Because of this, it would be quite an accomplishment for the U.S. to again export more than 11 million bales of cotton,” Shurley says.

“USDA's June estimate dropped 2003 forecast foreign production by 1 million bales from the May estimate so this makes me a little more comfortable, but still cautious, about the high export number.”

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