As Gary Adams, vice president of Economic and Policy Analysis for the National Cotton Council, took the podium to address the Sourcing USA Summit recently in Austin, someone asked if he had good news about the cotton market.

“I just hope to present as little bad news as possible,” Adams told an audience that represented cotton buyers and sellers from dozens of countries around the world.

Adams could have delivered the good news in less than a minute. Positive details include predictions that, in spite of severe weather problems across much of the U.S. Cotton Belt, yield potential still looks to be close to 700 pounds per acre and possibly the second highest per acre average on record. Yield remains above the five-year average. He said recovery typically occurs rapidly following a downturn in mill use.

Most of the rest of his comments focused on bad news.

Overall production will be down for 2008 with acreage down 15 percent. Adams said estimates indicate a 13.5-million bale 2008 U.S. cotton crop. From 50 percent to 60 percent of the U.S. crop has been harvested. “Texas has the largest number of acres left,” he said.

China's production is down only slightly. India's is up a little and both Brazil and Turkey are producing less cotton than in 2007.

Adams said volatility during the past year was “the rule and not the exception. No one would have believed that the market would see a December futures contract greater than 90 cents per pound and 40 cents per pound in the same year. That movement is unprecedented,” he said.

Outlook for 2009 appears grim as the global market contends with a more than ample supply and a worsening economic situation that threatens to undermine retail sales. Reduced acreage, competition from other crops with better profit margins and higher production costs also affect how farmers will plan for 2009.

Adams said even with reduced production from the 2008 crop, world supply numbers will remain fairly steady. Estimates put 2008 world production at 113 million bales. Adding a 60-million bale beginning stock figure leaves a total supply at 173 million bales. “We have an ample supply of cotton.”

The economic slowdown and tight credit also affect consumption. Adams said estimates of a 119-bale world mill use could be optimistic and that figure is off about 4 million bales from last year. “We are concerned that 119 million is too optimistic considering the financial situation. In fact, 117 million bales may be too much.” He said 113 to 115 million bales could be more realistic.

At that level, he expects “no real off-take from ending stocks. But recovery has a tendency to turn around quickly, a 6 percent to 8 percent range, following a slowdown in mill use.” Still, he said mill use estimates show a broad decline across all major textile countries.

He said a strengthening U.S. dollar could affect purchasing power of importing countries.

Adams said tighter credit and higher production costs are affecting China's cotton production, estimated at 51 million bales for 2008, a slight dip from last year. “But if the USDA estimate is too optimistic, China's mill use could be down even more.”

He said polyester prices also are declining in China. “That presents a challenge for cotton to maintain market share.”

Adams expects a continued decline is U.S. domestic consumption, down from 23.5 million bales in 2007 to 22.1 million bales estimated for 2008. “The last similar reduction occurred in 2001 during a period of slowdown in the U.S. economy,” he said. “Consumers will have hard decisions on how to spend disposable income.”

He did add that current estimates consider factors only through the third quarter of 2008 and do not account for recent declines in gasoline prices, “which could free up some income and could help.”

The export market will continue to drive U.S. cotton marketing. With 2008 production plus carryover, total U.S. cotton supply will be from 23 million to 24 million bales. Domestic mill use will take no more than 4 million to 4.5 million bales. “We should have about 19 million bales available for the international market,” Adams said.

He said the precipitous drop in cotton prices “still reflects some effects from the New York funds (as well as) the economic recession.”

He said the industry has some concern about how well the cotton market is working. “We're still feeling that currently the market is not as useful a tool as it could be to manage risk. We have to address this issue.”

He said cotton prices versus other crops will affect acreage in 2009. Production costs will continue to be a factor, as well. “Some cotton farmers will be waiting to see a recovery in demand.”

Adams said cotton is unique compared to other commodities. Currently, corn has an advantage with a better market price. Cotton, he said, competes with both corn and polyester, which is priced competitively with cotton fiber.

“Demand and price of competitive fibers will be important,” he said. “Long term, demand will be the key.”