What does the cotton market hold?

Recent USDA projections for the 2003-04 U.S. cotton crop call for stable production, declining domestic mill use, and record exports that analysts say could result in sharply lower ending stocks.

“These are obviously positive factors for the cotton market,” says John Anderson, agricultural economist at Mississippi State University in Starkville, Miss. “Overall, I believe the cotton market is going to be more positive than it has been in the last couple of years.

“The market is improving, and although a large crop would obviously damper that some, it's still too early at this point to determine the true size of this year's cotton crop. Even with a good crop, the lower carry-over and the higher export numbers will signal some improvement in the market,” he says.

Still, as the United States looks ahead to a possible 18-million bale crop this year, the world cotton market is beginning to show signs of the “jitters,” cautions University of Georgia Extension Economist Don Shurley.

December cotton futures closed at a new high of almost 63 cents per pound on April 21, and have since fallen back closer to 60 cents.

“While the price outlook still is mostly up rather than down, producers need to be watchful and take good opportunities for price protection when available,” he says. “For the time being, the market appears very comfortable at about 60 cents. Over the next few weeks and months, prices could fluctuate in the area of 58 cents to 64 cents.

There's also the possibility that the SARS epidemic could impact the 2003-04 cotton market. “One of the forces behind the current positive price outlook for cotton is a strong uptrend in world demand for cotton, and specifically, tremendous growth in foreign textile mill use of cotton, especially in China,” Shurley says.

“If the SARS outbreak in China acts to depress Chinese cotton consumption and mill business, that could act to destabilize the world cotton industry.”

In addition, he says, 2003 cotton prices may be affected by any difficulties in U.S. plantings and growing conditions. Growers in the upper Delta region have been hit by repeated thunderstorms that could force replanting or delay Mid-South crop development, at the least. The Southeast appears mostly in good shape as planting season gears up, but parts of Texas have been dry, and the California crop is off to a slow start.

“Total world cotton production is expected to be up this year in response to a stronger A-Index. But for now, the market appears to be more sensitive to the demand side,” says Shurley. “Producers wishing to take action to reduce risk might consider contracting a portion of their crop at 60 cents or better and follow up with call options later as the market shows potential for further increase.”

According to USDA's May 13 crop report, U.S. cotton production for the 2003-04 marketing year is projected at 17.2 million bales, virtually unchanged from the 2002-03 season, based on acreage forecasted in the prospective plantings report, combined with historical average abandonment and yields.

Domestic mill use for this year is projected by USDA to hit 7.3 million bales, a reduction of 2.7 percent from 2002-03, as rising textile imports continue to erode mills' share of the large U.S. retail market. Exports are projected up 4.5 percent to a record 11.5 million bales, due mainly to tight supplies and rising demand in foreign markets.

With lower supplies and higher disappearance relative to the current season, ending stocks would fall 24 percent to 4.7 million bales, their lowest level in four years.

World cotton projections for 2003-04 include sharply higher production, a modest increase in consumption and lower ending stocks. World production is anticipated to rebound 10 percent from 2002-03, rising to 96.5 million bales, the second highest level on record. The recovery in production is due mainly to stronger cotton prices combined with a return to normal weather patterns.

World consumption is forecast to rise 1.2 percent to 99 million bales, slightly below the long-run average growth rate. While economic recovery will continue to support cotton consumption, recent higher cotton prices are likely to result in a lower fiber share, as compared to polyester. World trade is also expected to rise slightly. Ending stocks are forecast at 34.5 million bales, the lowest since 1994-95.

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