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A Hazy Outlook

Projecting U.S. cotton’s short-term future is difficult, but even tougher today as uncertainties abound.

By Mark Lange
NCC President/CEO
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Is the global situation supportive of prices?

No. First of all, the repercussions of $2 cotton are still being felt throughout the U.S. cotton industry. Even though $2 cotton, as measured by Cotlook’s “A” Index, lasted for a relatively brief time in early 2011, the speed and magnitude of the price movements created tremendous financial stress on textile mills and cotton merchandisers. Consider that between August 1, 2010, and March 8, 2011, the “A” Index roughly tripled from an initial value of $0.86 to a peak of $2.44. Prices quickly retreated from those extremely high levels, and by the beginning of the current 2011 marketing year, the “A” Index stood at $1.15 per pound.

An underlying factor to that price retreat undoubtedly is related to the current 2011 world cotton crop estimate of 123.1 million bales, 6.6 million bales more than 2010’s total. Unfortunately, this increase mea-ns overall production is exceeding world mill use by a wide margin in the 2011 marketing year. That differential is projected at 15 million bales – even more than the 12 million bale margin seen in 2004 – and one that will result in projected world stocks of 65 million bales by July 31, 2012. This is a far cry from last season when there were concerns about adequate supplies of cotton.

Does a silver lining exist?

Despite concerns about demand and the expected increase in world stocks, cotton prices have maintained a relatively firm appearance, largely as a result of China’s cotton reserves policy. By late March, more than 14 million bales have been purchased in China’s reserve. While that country’s policy is providing short-term support to the cotton market, the future implementation of the reserves policy is the single largest wildcard in the cotton market. Eventually, as cotton is released from reserves, it likely will temper price potential.

What about the coming year?

For cotton farmers, the cotton stocks/use relationship likely will dampen upside price potential. The good news is that current polyester prices and the need for cotton to remain somewhat competitive with grains are supportive of prices on the downside. The most important factor is, of course, China’s current and future management of their reserves. China’s actions will have a bearing on export markets, which will continue to be U.S. cotton’s primary outlet. So, even though U.S. cotton exports are expected to surpass 12 million bales for the 2012 marketing year, that growth will be heavily dependent on policy decisions in China and in India. The latter country more and more is looking to disallow any additional exports for the current marketing year.

So, barring some major production problems – which are still a possibility given La Nina – global cotton production for 2012 is projected to exceed consumption and allow world ending stocks to reach record levels. However, it is important to remember that as much as 50 percent of those stocks are held in China and India.

Mark Lange is president and chief executive officer for the National Cotton Council of America. He and other NCC leaders contribute columns on this Cotton Farming page.

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