Foreign Production Deficit Key to Cotton Market
March 9, 2009 World mill use is projected to increase faster than production, indicating a stronger market. However, the perspective for the 2006/07 cotton market consists of bullish and bearish factors. On the positive side are fewer ending U.S. and world stocks, strong foreign demand, and severe drought in Texas and in several other Southeast and Mid-South states. Offsetting on the negative side are weak U.S. consumption, loss of the Step 2 Program, a sizable amount of certificated stocks, and a large cotton supply in exporting nations.
The ending stocks-to-use (s/u) ratios have declined to a market supporting 22% in the U.S. and slightly under 40% for the world. If the U.S. crop gets smaller by harvest, carryover stocks may slip below 4 million bales to the smallest level since the 3.45 million in 2003/04.
Foreign mill use, projected at 116 million bales, is gaining momentum. That is 14 million more bales than two years ago. Too, foreign stocks are somewhat tight. With over 2 million acres of Texas cotton (34%) abandoned and substantial acreage lost in Alabama and Georgia, a smaller U.S. crop will cut 2006/07 supply by more than 3 million bales.
Offsetting this support is weak U.S. consumption of lint cotton and garments. Sales of clothing have slowed as consumers shift to spending more on fuel.
The loss of Step 2 payments will force U.S. cotton prices to fully reflect all handling and shipping costs necessary to compete in international markets. In August, the USDA adjustments from the Northern European price (A Index) to U.S. 41-34 upland base quality and location was nearly 16 cents per pound. That means the adjusted world price (AWP) plus some allowance for risk of handling will place a strong lid on U.S. farm price far below the world price level. Expect equities offered for Commodity Credit Corporation (CCC) loan cotton to be lower this year due to no Step 2 payments.
Certificated stocks of several hundred thousand bales are a threat that holds the futures price in line with the cash market for 41-34 base grade cotton. The result without Step 2 is a wider difference (basis) between the world price and U.S. futures contract than when the program existed.
Stocks in major exporting nations continue large with an 84% s/u ratio. Abundant stocks of 61% s/u or more have existed in the main countries exporting cotton since the 2003/04 rally in prices. A 21 million bale shortfall in foreign production versus consumption indicates a strong market for U.S. exports.
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