U.S. merchants could sell up to 10 million bales of American cotton to Chinese textile mills this marketing year – if they can find a way to move those bales out of the country, says Globecot Chairman and CEO Ed Jernigan.

Jernigan’s 10-million-bale estimate is 2 million to 3 million bales above the consensus of most U.S. cotton analysts and could have major ramifications for New York cotton futures if Chinese mills buy and U.S. merchants can transport that much cotton.

Currently, Globecot, a Nashville, Tenn.-based international marketing information services and cotton-trading firm, is forecasting total Chinese cotton consumption at 46 million bales, 3 million bales higher than USDA’s latest estimate for the 2005-’06 marketing year.

“On one side, we are very bullish on consumption, given the level of investment the Chinese have been making in their textile sector,” said Jernigan. He noted that investment was up 57 percent for January-November 2005 compared to the same period in 2004.

“That level of investment – which was up from a record level in 2004 – has driven China’s consumption much higher than many would have expected.”

China’s National Bureau of Statistics is projecting Chinese 2005-’06 cotton consumption at 9.7 million metric tons or the equivalent of 44.566 million 480-pound bales. “With the much higher level of investment that is occurring, that could take us up to 49 million to 50 million bales,” says Jernigan.

On the other hand, the Chinese government’s “slow release” of quotas and imposition of import taxes ranging from 1 percent to 5 percent on cotton imports above the quota level of 4 million bales is forcing mills to pay higher prices for cotton. As a result, domestic prices have rallied 25 percent from a year ago.

“The price situation means that the mills are seeing their margins squeezed,” he said. “For that reason, I’m a little more cautious than I have been.”

Most forecasts now put China’s 2005-’06 production at 26 million bales, which, if Jernigan’s 46-million-bale consumption estimate is on target, would leave a gap between supply and demand of 20 million bales.

He believes the United States can fill at least half of that gap if merchants can resolve some of the transportation problems that have beset the industry, particularly on the Texas High Plains.

Reports indicate that warehouses on the High Plains, where growers are harvesting a record 5.63-million-bale crop, are running more than two weeks behind on shipments due to a shortage of trucks and lack of inside storage.

USDA’s Farm Service Agency recently issued rules allowing temporary outside yard storage for 2005-crop cotton after merchants complained about contamination of bales that had to be stacked outside after the crop overwhelmed existing warehouse space.

The USDA notice (BCD-117) requires warehouses to identify bales that are being stored outside and establishes time limits to encourage warehouses to move the cotton to indoor storage as quickly as possible.

“We believe that the United States could sell 10 million bales to China in 2005-’06, but the question is can we ship it?” said Jernigan. “I think we can.”

The much-maligned Step 2 payment that the United States government has promised to eliminate by the end of the current marketing year could be a positive for helping merchants reach that 10-million-bale figure.

“Merchants will get 3 cents a pound from Step 2 if they ship the cotton before July 31,” said Jernigan, “and they get zero if they ship it after that. I’ll bet they can figure out some way to get the cotton shipped.”

It’s ironic that the U.S. cotton industry, which profited from China’s infrastructure problems for years, now faces similar problems of its own. For years, it reportedly was cheaper for Chinese mills to import cotton from overseas than to move it from the interior – where most of the cotton was grown – to mills, which were mostly located in coastal areas.

“China has invested billions and billions of dollars in its infrastructure,” says Jernigan, whose company is involved in a number of joint ventures with Chinese firms. “Their ports are more modern than ours.”

Cotton market “bulls” have been counting on increased U.S. sales and shipments to China to help keep carryover stocks down and New York futures in the mid- to upper-50-cents range.

“Were it not for China I would be worried about the 6.9-million-bale carryover levels for the current year (U.S. crop),” said O.A. Cleveland, professor emeritus with Mississippi State University, who spoke recently at the Cotton Economic Outlook Symposium at the Beltwide Cotton Conferences in San Antonio, Texas.

Cleveland, who works with Globecot on some projects, indicated he agrees more with Globecot’s take on the Chinese supply/demand situation than with that of USDA and other forecasting institutions.

“China, as we have said for years, is the future of cotton as their cotton consumption continues to grow and will expand again next year,” he noted. “Globecot has been predicting China would consume 45 million to 46 million bales for a year now, and they are proving to be correct again.”

As of early January, the United States had sold 5.2 million bales of cotton to China in the 2005-’06 marketing year that begin Aug. 1 and appeared to be on track to sell between 7 million and 8 million bales by the time the marketing year ends in July. The 5.2 million bales are more than the United States shipped to China in 2004-05 (5.05 million).

The prospects for increased sales to China are critically important if merchants are to meet or exceed USDA’s U.S. export forecast of 16.4 million bales for the current marketing year. China has been purchasing from 130,000 to 250,000 bales per week, sometimes accounting for half or more of U.S. weekly sales.

Analysts say U.S. export sales must average about 325,000 bales per week to keep from falling below the 16.4-million-bale export estimate. If the latter happens, the 2005-’06 carryover stocks will rise above USDA’s current forecast of 6.9 million bales. When carryover stocks rise, market prices generally fall.

But sales of 10 million bales to China could help reduce carryover stocks to 3.9 million to 4.9 million bales, not a burdensome level at all, according to analysts.

e-mail:flaws@prismb2b.com