Economic Slowdown and Cheap Imports to Blame
The International Cotton Advisory Committee shocked the market in July 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 fell faster this year than anyone could have predicted. In the first week of July, the front contract month rested near the 15-year low of 37.50 cents per pound set just a few weeks earlier. The figure was almost half of its value from a late-November contract high of 71.01 cents per pound.
Back in January, world cotton demand was outpacing world production, and cotton market observers were predominately bullish; however, the bears soon seized the market. Although U.S. export sales to overseas mills eventually increased and have been very strong this spring and summer, U.S. warehouses still are holding an increased portion of world cotton stocks. 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 a strong U.S. dollar and the persistent pressure of cheap textile imports from Asia, sent the U.S. textile industry into a fresh cycle of mill slowdowns and closures. In fact, according to National Cotton Council (NCC) figures, approximately 40 U.S. textile mills have closed in the past year. Therefore, domestic mills are consuming far less cotton than in past years.
Adding more pessimism to the mix is the fact that no immediate relief will come from the Caribbean Basin Initiative (CBI). Without final approval for import regulations, it is unlikely that domestic use will benefit from the trade agreement in the near future.
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 5 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 million bales of cotton. In comparison, production forecasts for the 2001-02 crop range from 18 to 20 million bales with more sentiment migrating toward the upper end of the range.
Through mid-July, the Texas crop was the only rough spot in the near-perfect U.S. crop outlook. West Texas dryland farmers still were waiting for rain, but the weather situation is not out of the ordinary for the region. “Some years we get a crop and some years we don’t, but we go through this every year,” a West Texas producer said.
Most of the cotton crops in South and Central Texas are better than many analysts anticipated. According to one Central Texas market observer, the crop in that area could match the bumper crop of 1999 if a rain was received in time to finish the crop.
Unfortunately, a bumper crop will not yield as much income as it did in 1999 as the outlook for prices in the upcoming year is not optimal.
“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. The current scenario will have producers concentrating on price issues that normally are not of significant concern in their operating decisions.
“Because cotton is trading well under the loan, a trend which will likely continue for the remainder of the year, the issue of concern to producers should not be where the New York Cotton Exchange is trading but what loan plus equity will be,” said David Stanford, vice president of marketing at Plains Cotton Cooperative Association.
According to Stanford, very little cotton has transferred from producer to merchant on a forward basis. However, three to four million bales of next year’s cotton crop have been committed for export by merchants.
“Early demand for cotton should be reasonable, but as the season progresses, selling the crop may be more difficult, especially if USDA’s current U.S. production figure comes to fruition,” Stanford said.
Many producers are gearing up for a difficult year. One analyst shared his advice for the upcoming season – and it sounds easier said than done. He instructed, “As is the case in all facets of the cotton industry, cotton producers will have to make intelligent and timely decisions concerning product and attempt at all times to land on their feet.”