As the bulk of the 2002-03 U.S. cot-ton crop hits the marketplace, cot-ton prices on the New York Cotton Exchange seem to have made a recovery. In fact, cotton prices in early December were approximately 10 cents higher than one year ago. The scenario, however, is a “double-edged sword,” according to David Stanford, PCCA’s vice president of marketing.
On the surface, it would appear producers are receiving more money for their crop. Yet, while the boost in cotton prices results in more income from the marketplace, it is counteracted by lower government payments.
“U.S. cotton producers can expect to get the loan price plus a marginal equity,” says Stanford. “When they are marketing their cotton, I would encourage producers to watch the difference between the Adjusted World Price (AWP) and futures prices,” he continues. “Growers will have the best chance to gain additional equity out of the market when the difference is 11 to 13 cents per pound.”
Many factors have influenced the recent increase in U.S. cotton prices, but China’s appearance as a material importer of cotton this season has provided a fair amount of strength to the market. Approximately 500,000 bales of U.S. cotton had been exported to China as of Nov. 26, and many industry observers expect the total to reach 2.0 million bales by the end of the marketing year.
China apparently has utilized most of its ample supply of carryover stocks, and the country’s increasingly large share of the world apparel market has sparked the need to import raw cotton.
“Unfortunately, we are again in a no-win situation,” Stanford says. “China’s re-entrance into the marketplace has introduced a liquidity to the market that we haven’t experienced in recent years, and cotton prices have pushed higher. Yet, the country’s rising share of the apparel industry takes money out of the pockets of U.S. textile mills and textile facilities in other Asian countries that typically buy raw cotton from the United States,” he explains.
With an estimated 17.14 million bales of 2002-03 crop U.S. cotton hitting the already saturated marketplace this season, some analysts are concerned about a substantial carryover at the end of the marketing year. However, other analysts believe a light is at the end of the tunnel, and although it might be difficult to endure the situation this year, it could be the last season for quite some time that U.S. cotton carryover will be a significant problem.
“It will be quite a challenge to move all of the 2002-03 crop cotton into the marketplace before another year goes by,” Stanford contends. “However, the balance of carryover stocks is improving worldwide, and the export outlook for the next few years is encouraging.”
In the meantime, the government’s new countercyclical payments and higher cotton yields for a number of cotton producers this year will provide small sources of added revenue. The extra cotton from a bumper yield once resulted in unexpected income to pay off debts and perhaps have money left over. Now, the added revenue might be just enough to keep a cotton producer in business for another year. Obviously, producers would prefer cotton prices go higher, but as one grower said, “I’m not making a decent profit like I used to, but at least the prices are going in the right direction for a change.”