About the only thing cotton farmers can be sure about with the 2004-05 cotton market is that it's likely to offer surprises.
“In an export-driven market, price can shift without warning,” says Carl Anderson, professor and Extension cotton economist, Texas A & M University.
Anderson addressed the annual Texas Cotton Association convention recently in San Antonio and cautioned growers, shippers and buyers to watch for sudden price movements.
“We have a market that's no longer dictated by supply and demand. We now have a mix of supply, demand and politics,” Anderson said. “That means the difference in price, from the high to the low, may be as much as $100 per bale. Also, the market tends to run too high and too low.”
He said China's purchases last fall pushed the market far higher than fundamentals justified. “It went straight up and when China got out of the market it went the only way it could, straight down.”
He said the trend of consumption outstripping supply that has buoyed the market for the past two years will reverse this year.
“I think the world will produce at least 3 million bales more than demand. If we have a 100-million-bale crop, I think we'll consume 97 million bales. China's internal economic problems will hurt demand. Until cotton producing countries re-align demand we can expect downside pressure on prices.”
Anderson said the cotton market currently is in a “confused area.” The “A” index has turned down. “I think the world will plant more cotton this year unless corn and soybean prices move up considerably. We'll plant more cotton in the United States.”
Anderson said a 500,000-acre increase in Texas will offset any reduction Mid-South farmers make in favor of corn or soybeans.
Anderson expects a 14-million-acre crop in the United States with about an 18-million-bale production.
He expects no better than a flat consumption rate, especially with China's announcement that the government will pour water on an economy that's heating up too fast. He said if China makes an average crop and pulls back on manufacturing they'll close the 5-million-bale gap between production and consumption.
“That wipes out what they order from the United States.”
China keys exports
He said the last few years the United States has captured about 40 percent of the export market, while losing 5 million bales from domestic manufacturing. “If China makes a crop this year, we will not hit that 40 percent mark,” he said. A 25 percent to 30 percent share will be more likely.
Anderson expects little price movement, even with a stable carryover, and he recommends that growers look for opportunities to buy put options, at reasonable prices, for cotton 60 cents or higher.
“Be careful with price risks,” he said. “We could see some run-ups but growers must watch for the downside. An export-driven market comes with total uncertainty.”