Economists comfortable with 60-cent December futures

Two of the world’s leading cotton economists, O.A. Cleveland of Mississippi State University and Carl Anderson of Texas A&M University, are a bit more bullish than bearish about the outlook for the U.S. 2005/06 cotton crop.

Anderson says he is a bit less bullish than Cleveland. Both spoke at cotton options marketing seminar that drew about 40 people to Harris Ranch near Coalinga, Calif., recently.

Cleveland says his evaluation of the world cotton market makes him "comfortable" with a December futures range of 65 cents to 66 cents per pound. If there are production problems in China or the U.S. this year, it could go above 70 cents. However, Cleveland said "don’t wait for that to happen."

Anderson noted that since early February, December futures have strengthened by about 10 cents per pound. However, he said a large supply of cotton in exporting countries outside of China is hanging over the market. Anderson said economic problems in China, the world cotton market’s proverbial 800-pound gorilla, could stifle textile production expansion there and therefore, cotton imports.

An explosive Chinese consumption market is what Cleveland bases his bullishness on.

Anderson says a December futures rally above 60 cents appears unlikely.

Please note that it was not until the third paragraph of this cotton marketing article before the word China appeared. Most cotton marketing reports begin with C H I N A.

There is good reason for that, according to what Cleveland reported to the group of California and Arizona cotton producers at the seminar sponsored by Cotton Incorporated, New York Board of Trade, California State University Fresno and the University of California.

China could consume 40 million bales of cotton in 2005/06 with a domestic production of about just 25-27 million bales. That means China will likely import at least 13 million bales of cotton next season, about the same as this marketing year ending July 30.

The U.S. is expected to get the bulk of that Chinese business.

Cleveland said if there are production problems in the U.S. or China, China’s insatiable demand for cotton could go unmet.

Dominating market

China is dominating the textile market worldwide, and it is driving the bottom out of the U.S. textile industry, which has used a little more than 6 million bales in each of the past two seasons. Cleveland and others say those numbers do not mean a domestic cotton market plateau. It could go 2 million bales below that as the impact of textile quotas disappearing effective Jan. 1, 2005 grows.

"China has taken domestic consumption of textiles not only in the U.S., but all over the world. China is not picking on the U.S." he said.

And the world’s most populous nation has the spindle capacity to take 42 percent or more of the world’s cotton consumption

"Western interests are still looking to invest in China," said Cleveland. "I see no light at the end of this China consumption tunnel."

"The export market in China and the world is not just a bale of cotton, but a quality bale of cotton the export market wants," he said. He says 60 percent to 65 percent of U.S. cotton now moves into export market and to maintain that, quality must be delivered to foreign mills.

A significant percentage of the huge 23-million 2004 U.S. crop does not meet that export quality standard. For example, of the 5 million bales of 2004/05 cotton classed in Texas at Lamesa, Abilene and Lubbock classing offices, only 1.9 million bales were tenderable on the New York Board of Trade future contract.

Quality nips price

The lack of quality has played a major role in depressing the May and July futures contract this season.

Cleveland is projecting a 20.6-million-bale 2005/06 U.S. crop from 14 million acres. Texas contributed a Texas-size percentage of the huge ’04 U.S. crop and, according to Cleveland, the Lone Star State is poised for a repeat.

"Texas has maybe the best moisture ever for its dryland crop. It has the makings of a huge crop. They had a huge one last year and the moisture conditions now may be better than last year," he said.

He does not expect repeat of the large ’04 Mid-South crop produced under ideal conditions. He expects good yields again from the Southeast.

The Western crop was late planted with 65 percent seeded by May 1 compared to a five-year average of 90 percent. Although it is behind, Cleveland says Western growers know how to make up for lost time.

Cleveland said the U.S. crop overall was 27 percent planted May 1 compared to 30 percent for the average.

"We are pretty much on schedule," said Cleveland, who said lateness does not concern him. The three largest mid-South crops ever were the three latest planted.

World ending stocks on July 30 this year are expected to be 47 million bales, 12 million more than last year.

World consumption for ‘04/05 is projected to end up at 106 million bales, 8 million bales more than last year, but not enough to offset the 24 million bale increase in world production.

Continued cotton consumption increases is the primary reason prices have not fallen completely out of bed with the huge world supply.

Bale forecast

Cleveland is projecting world production to be down to about 108 million bales for ‘05/06. Cotton acreage is expected to drop in most nations. In China, it will decline about 10 percent, Cleveland added.

World ‘05/06 consumption will continue to increase and will be only about a 500,000 bales above production.

Cleveland presented the production/consumption outlook. It was Anderson’s role at the day-long seminar to help growers understand how they can profit from the market that has experienced $100 to $150 per bale price swings over the past six years.

Using futures and options has been the siren call of marketers and others for years, but most growers have difficulty understanding how to use them or are unwilling to take the risks.

Anderson says all it takes is an understanding of basic supply and demand fundamentals and then taking action. He says options are less risky than the stock market.

However, he said as parts of gaining understanding of how cotton marketers work, the worst thing a grower can do is go to the local gin or coffee shop and listen to "all the B.S." there before making marketing decision.

"Developing you own skills in evaluating and interpreting price expectations," he said.

Markets, he said, are not going to give a grower anything — take action. Don’t wait too long and don’t try for peak markets. Don’t make a season-long decision in one day. Space pricing over time, and use scale up pricing during rallies.

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