Foreign Cotton Production and Demand Drives U.S. Market
Dr. Carl Anderson sends along his market analysis in a special exclusive to Cotton Grower.
July 6, 2010
By Dr. Carl G. Anderson
Special to Cotton Grower
Foreign cotton stocks are projected to be the lowest in seven years. However, because price is some 20 cents per-pound higher than a year ago, foreign and U.S. growers are planting more cotton.
Evidence of a large foreign crop would reduce market support. Yet, with the expected balance in the world supply/demand/price relationship, December ’10 futures may remain for several months above 70 cents.
Although foreign stocks had been stable for several years, in 2009/10 the shortfall between production and consumption increased over by 10 million bales to a record 22.3-million-bale deficit according to USDA.
That dropped foreign ending stocks to 46.8 million bales in 2010/11, the lowest since the 2003/04 crop. And, the deficit in production to consumption for the new crop is projected to be 18.6 million for a two-year shortfall of over 40 million bales. Meanwhile, demand is recovering from the setback in economic activity two years ago.
The limited foreign supplies will provide a strong export market for U.S. cotton. In the last five years (2005 through 2009), U.S. exports have averaged 13.9 million bales per season. In June, USDA projected export shipments of 13.5 million bales from the 2010/11 crop. Thus, U.S. domestic use of 3.3 million bales plus exports are expected to about equal production, leaving another year of low U.S. stocks.
With U.S. supplies tight, prices will likely change faster and greater than in the past. International market forces will be a mix of individual country policy developments, varying economic conditions, uncertain production and spurts of speculative and industry trading. The financial risk stemming from likely adverse price changes requires careful risk management strategies by all industry participants. The main objective is to establish a price floor or ceiling with the flexibility of benefiting from favorable price moves.
This season’s highest world cotton price in 15 years has set the stage for another round of increasing world stocks. Weather conditions will largely determine if it will take one or two years for December futures to trade in the 50- to 55-cent range.