PCCA - Plains Cotton Cooperative Association Logo PCCA Commentator Magazine Masthead. Vol. 31, No. 3 | Winter 1998-1999

Cotton Market Continues to Struggle

The 1998-99 U.S. cotton crop this fall entered the second part of a year-long battle. After a growing season filled with blistering heat and little rain in many areas of the Southwest, it must now take on a bearish demand situation, even in the face of what could be a tight world cotton supply.

With little significant news on which to trade, cotton observers anxiously anticipated USDA’s November supply/demand report, hungry for figures that would support cotton prices by reinforcing the existence of a shrinking U.S. crop. The actual figures released on November 10 surprised many analysts and revealed that the 1998-99 U.S. cotton crop had been lowered to just 13.23 million bales, down only slightly from the department’s October prediction of 13.29 million.

Although the government said its forecast accurately reflected expectations of a weaker harvest and smaller yields due to adverse weather conditions in several cotton producing areas, it was far from pre-report industry estimates that averaged 13.03 million bales.

The department left demand estimates unchanged, tightening the historically firm stocks-to-use ratio slightly to a projected 15.2 percent, a number that will put pressure on cotton prices according to some analysts. World production was seen falling faster than consumption, which appeared to be the softest of all of the numbers, and pulled down the global stock estimate 1.1 million bales to 37.3 million.

Balancing out much of the negativity caused by the U.S. production estimates, world production was pegged at 83.6 million bales, down from the previous month’s 84.7 million bales figure, while carryout was lowered from 38.4 million to 37.3 million bales. Many analysts are happy to see world production numbers down, a trend they hope will continue because of the opportunities it opens up for U.S. cotton exports.

USDA’s November alterations to its 1998-99 U.S. crop estimate resulted in changes in virtually every state, although the adjustments combined to produce only a small net decrease from a month earlier. The area for harvest across the Cotton Belt remained unchanged, with the exception of Oklahoma, where 20,000 acres where added. USDA left Texas cotton production unchanged at 3.0 million, including 2.0 million bales from the High Plains region. Those numbers, combined with the additional 20,000 acres and a 20 pound-per-acre yield increase in Oklahoma pushed the Texas/Oklahoma crop 25,000 bales higher to a total of 3.1 million bales.

Cotton harvest in Texas has been met with adverse weather conditions, and a difficult finish to a growing season that saw more than its share of struggles. Wet weather was seen much of the time during the South Texas harvest, where rain accumulations from several tropical storms reached anywhere from traces to more than 10 inches, forcing producers to take an unintended break in their work.

Harvest in West Texas also has moved slower than usual, with rain falling on open cotton. Classings offices there have reported an increase of leaf and bark in cotton samples resulting in lower grades for much of the cotton delivered and setting the crop up for inevitably lower prices. Earlier in the season, most of the dryland crop was lost during an extremely hot and dry spring and summer, and the small amounts of dryland cotton that remain have produced very low yields. Turnouts for irrigated cotton generally have been good, although it remains to be seen if the high levels of input required to produce the crop will pay off.

Recent activity in Washington,D.C., has been of particular importance to cotton producers. Two strong advocates of agriculture have been placed in position to control future cotton legislation: Larry Combest, who will step up to become the House Agriculture Committee chairman; and Charlie Stenholm, who will become the ranking democrat on that committee.

House and Senate negotiations resulted in legislation amounting to funding of approximately $5.9 billion for the Department of Agriculture (USDA), the Food and Drug Administration (FDA) and farm relief aid, all packaged into the 1999 U.S. budget signed into law by President Clinton in late October.

The budget contained a controversial proposal to raise the threshold for USDA’s Cotton Competitiveness Program, most often referred to as the Step 2 export marketing program, from 125 points to 300 points per pound. Current farm legislation limits the total amount of Step 2 expenditures to $701 million between 1996 and 2002. Sources report only $146 million remained in the program as of November 6, and most analysts agree the funds could be depleted by late December of 1998.

According to David Stanford, vice president of marketing at Plains Cotton Cooperative Association (PCCA), a plan must be established quickly to determine in which direction the program should move after the money runs out.

“The lack of funding leaves U.S. prices substantially above world prices,” Stanford said. “With no hope of further funding, world and U.S. prices will have to come together in some way,” he observed.

Secretary of Agriculture Dan Glickman had announced USDA would honor spinners and exporters who had a current agreement specifying a 125 point threshold, and that the change would remain in effect for the purpose of calculating the Step III import quotes. According to Stanford, the future of agriculture is something that will demand much attention from Washington for some time to come.

“All of agriculture is under such financial pressure that it is likely when Congress reconvenes agricultural aid legislation will have to be reevaluated,” Stanford said.