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The Prospective Plantings Report released by USDA on March 30 showed a significant decrease in prospective cotton acres across the country, yet prices continue to move in a narrow range. Gary Adams, Chief Economist with the National Cotton Council:
“The prices have been moving in a sideways range and as we look at the perspective planting we are expecting lower acreage in most cotton belt states, and about 11% across the US. I think the focus right now is on prices and in the cotton market what is happening on the demand side. I think they are also looking at what other countries like India and China are doing. As a result there is enough concern on cotton demand that its putting a damping effect on the upside price potential.”
And those prices continue to remain in a sideways pattern in spite of a very low 2011 carry-out due to weather problems last year:
“It’s interesting that things are a bit tighter on the US balance sheet than they are outside of the US. We did have production problems in a few places, the terrible drought in the southwest, some dry weather in the southeast and some late season hurricanes. All of that gave us a crop of about 15.5 million bales last year. By historical standards its still keeping our stocks at a relatively tight level. But with us exporting about 80% of our product, so much of our market and our farm gate prices are influenced by what happens outside US borders. As a result that has had a big effect on where prices are going right now and likely where they will head.”
China is by far the biggest buyer of US cotton, and it’s been reported that their economy is slowing down. Adams explains how that situation is playing into the stagnant futures market:
 “It is still growing but it has slowed down. China’s economy is not as robust as it had been and that has an effect on their overall demand. China is also starting to see some increase in their production cost, on the textile side, where they are seeing some higher wage rates and labor costs. It’s also a situation where you look at internal cotton prices in China, their prices are substantially higher than their polyester prices, so we continue to fight that battle for demand and it’s a struggle against the competition from man-made fibers. All of that has limited China’s cotton demand over the last few months.”
Adams says the US economy is also playing a significant role:
“There is still a lot of uncertainty at the consumer level, particularly how they will spend their disposable income. We know that the employment picture has improved over the last few months but there is still a relatively high level of unemployment. When we look back at some of the retail data from 2011, consumer had cut back on some of their purchases of textile and apparel goods. We expect it to look a little better in 2012, but at the not back to the historical highs that we have seen. Also as fuel and energy prices creep up, we know that takes more of the consumer’s disposable income and they will continue to spend more money there and less on textile products.”
As far as where futures are headed, Adams is a bit dubious:
“When we look at where prices may go, which has become a much more difficult task in the cotton market when you consider where we have been over the last 12-18 months, there is a good amount of volatility in the cotton market. We are looking at reduced acreage in the US, but if the weather cooperates, we may see a larger production than last year even on less planted area. Looking internationally, I think we will see other countries planting less cotton, but the concern from a pricing perspective, we are likely to see enough cotton to meet demand over the coming months so, along with the general uncertainty over the economy, the upside potential will be limited and the sideways pattern will continue. "
image courtesy chinadaily.com.cn
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