Too Much Cotton + Weak Demand = Poor Prices

Writer: Tim W. McAlavy, (806) 746-6101, email: t-mcalavy@tamu.edu
Contact: Carl Anderson (979) 845-8011, Jackie Smith (806) 746-6101

LUBBOCK – Too much cotton combined with weak demand in world markets adds up to poor prices for U.S. cotton producers, according to two Texas A&M economists.

Unfortunately, that situation isn’t likely to change anytime soon. At best, prospects for price improvement for old crop cotton are dim – while those for new-crop (2002) cotton are uncertain.

“We started 2002 with a bearish USDA Supply and Demand Report that cited higher U.S. production, declining mill use, and a market-depressing carryover of 8.6 million bales,” said Carl Anderson, Texas Cooperative Extension cotton marketing economist. “Domestic mill use was pegged at 7.7 million bales, the lowest we’ve seen since 1987.”

Higher world production and ending stocks further aggravates the situation, noted Jackie Smith, Extension economist-management based at Texas A&M’s Lubbock Research and Extension Center. Smith was a featured speaker on price outlook at several recent agriculture conferences hosted by Texas Cooperative Extension on the South Plains.

“China found another 900,000 bales to put on the world market. That helped bring world cotton stocks up to 44.1 million bales, roughly 10 million more bales than we would like to see in a reasonable carryover number,” Smith said. “The bad news here at home is our U.S. carryover of 8.6 million bales is about five million bales higher than it ought to be.”

While some market watchers are looking for U.S. and world cotton acreage to decline this year, U.S. producers would have to cut their acreage by about 4 million acres (25 percent) to make a dent in the large carryover. That probably won’t happen, simply because of low price prospects for alternative crops, Anderson said.

“This leaves the U.S. cotton industry in a terrible situation. It’s similar to 1931, when the world’s planted acreage totaled 39.1 million acres. Production of 17.1 million bales, use of 14.1 million bales and a carryover of 6.6 million bales created an average market price of 5.57 cents per pound,” he said.

Uncertain planting intentions, yields, and consumption in 2002 could mean futures prices ranging from 25 to 55 cents per pound for the 2002 crop. And that may limit producers’ pricing alternatives, since the farm program cotton loan rate is above this expected trading range.

“We’ve already seen market prices for old-crop cotton move a little higher, and I doubt we’ll see any more upward movement,” Smith said. “I believe 40 cents is about the top futures price we’ll see for March contracts, if that much.”

With several million bales of U.S. cotton already in the loan (that may be forfeited), and a substantial amount not eligible for the loan, Anderson doesn’t expect old-crop futures prices to rally beyond 42 to 44 cents per pound.

The outlook for new-crop (2002) cotton prices isn’t much better, the economists said.

“If we don’t see a substantial decline in U.S. and world carryover, we could be looking at a price of 30 cents per pound or less,” Smith said. “If you see December ‘02 futures contracts moving up near 50 cents, I would start selling.”

Anderson noted that a price rally up to 66 cents per pound in the A index will reduce producers’ loan deficiency payments. “In the year ahead, we are faced with loan rate market prices (51 cents) and whatever additional income we may receive from government payments,” he said.

Smith said an 18.5 million-bale 2002 crop combined with existing stocks of 8.5 million bales could put total U.S. supply in 2002 near 27 million bales. If domestic mills consume about 7.5 million bales, and if exports reach an optimistic 10 million bales, U.S. ending stocks could approach 9.5 million bales with a stocks-to-use ratio of about 54 percent.

“If that scenario pans out, we could see futures prices trading between 30 and 32 cents per pound. The one bright spot in all of this is potentially higher U.S. exports. We could ship that 10 million bales, or more, if our prices remain low and if there is another shortfall in foreign production versus consumption,” he said. “Even so, producers should stay tuned to the market and watch for any upward price movement. Be ready to sell on those upward ticks, and consider using put options even if you are in a marketing pool.

“It’s going to take a global weather event to reduce production and world stocks, and push Dec. ‘02 futures back near 50 cents. In the meantime, we have to take whatever we can get from the market whenever an opportunity arises.”

Anderson’s monthly Cotton Market Comments newsletter is available on the Internet at:
http://agecoext.tamu.edu/commodity/cotton/list.htm.

Smith and other Extension economists teach producers how to improve their marketing skills through Extension’s nationally-recognized Master Marketer program. The current session of Master Marketer workshops/seminars in Amarillo will include a 2002 Ag Outlook and Marketing Strategies Conference on Feb. 12 at the Amarillo Research and Extension Center.

Texans can contact their local county Extension office for more information on the Master Marketer program; or Fran Bretz or Steven Amosson in Amarillo (806-359-5401) for more information on the Feb. 12 conference.