July 5, 2001

In a week shortened by the Independence Day holiday, bearish sentiment was fueled by expectations of a huge U.S. crop resulting from a larger than expected U.S acreage figure and favorable weather conditions.

The International Cotton Advisory Committee (ICAC) shocked the market this week with a headline proclaiming "No Recovery in Sight for Cotton Prices." The data contained in the story that followed was not fresh news to analysts, but the headline spelled out what most in the market were afraid to say aloud.

Cotton prices have fallen faster this season than anyone could have predicted. July, the front contract month, now rests near the 15-year low of 37.50 cents per pound set near the end of June. The figure is almost half of its value from a late-November contract high of 71.01 cents per pound.

Back in January, cotton market observers were mostly bullish since world cotton demand was outstripping world production. However, the bears soon took over the market. Although U.S. export sales to overseas mills did eventually increase and have been very strong this spring and summer, the U.S. still is holding an increased portion of world cotton stocks in its warehouses. The overstock is due in part to China's decision to allow its cotton stocks to shrink instead of filling domestic needs with imports.

At the same time, a decline in domestic cotton use began to affect the market. The economic slowdown in the United States, combined with the persistent pressure of cheap textile imports from Asia, sent the U.S. textile industry into a fresh cycle of mill slowdowns and closures. Therefore, domestic mills are consuming less cotton.

In addition to these price-depressing scenarios, 2001-02 U.S. cotton plantings have risen from a year ago even in the face of lower prices. The USDA subsidy for cotton crop insurance made it more profitable to plant cotton than other crops. Cotton acreage in the high-yielding Delta region jumped a staggering 22 percent with total U.S. plantings up five percent at 16.2 million acres.

Some observers now contend 2001-02 cotton yields could drop as many farmers attempt to lower production costs by skimping on fertilizer and pesticide applications. However, the weather has been exceptional through the mid-point of the growing season, and the crop still could be enormous. One year ago, U.S. growers produced approximately 17.0 million bales of cotton. In comparison, production forecasts for the 2001-02 crop range from 18.0 to 20.0 million bales with more sentiment migrating toward the upper end of the range.

"Only a crop disaster of significant scale or a major improvement in the world economy is likely to alter the depressed outlook for cotton prices in the upcoming year," an analyst said.

Meanwhile, USDA's weekly export sales report showed net sales of 2000-01 U.S. cotton totaled 43,100 bales for the week ended June 28. Mexico was the major buyer for the week. Net sales of 2001-02 U.S. cotton were pegged at 49,200 bales, down from 127,500 bales the previous week. Export shipments for the week totaled 142,500 bales with Mexico, India, Pakistan and Turkey the primary destinations.

Additionally, spot cotton sales were lower for the holiday-shortened week ended July 5. Online trading of Texas/Oklahoma/Kansas cotton totaled 8,046 bales, a decline from the previous week's sales of 16,791 bales. Spot cotton prices for the week were lower as online trading occurred within a range of 30.92 to 32.03 cents per pound compared to 32.21 to 33.77 cents per pound the previous week.