William B. Dunavant says cotton farmers probably won't see a lot of merchants “beating down their doors” to buy their cotton over the next three months.
But once November rolls around and the cotton market begins to learn more about the status of China's cotton stocks and whether it intends to conform to WTO rules, things could get quite interesting, he says.
Dunavant told farmers attending a cotton quality and marketing seminar in Memphis that he believes December futures could trade in a range of 44 to 52 cents per pound over the next several months.
What could push futures to 52 cents, a price not experienced by the nearby contract since early in 2001? “If China really becomes aggressive in issuing import licenses late this year or early next year, we could see prices move up significantly,” he said. “So much depends on what happens in China.”
Production and stocks figures for China have always been a mystery, but this year's numbers are proving to be even more puzzling than usual, said Dunavant, the chairman and CEO of Memphis-based Dunavant Enterprises.
“USDA recently raised its estimate of Chinese stocks 3 million bales to 13.1 million, an estimate that is angrily disputed by our people in China,” he said at the seminar sponsored by Bayer CropScience and the Ag Market Network.
“They put the carryover in August 2003 at 9 million bales. Our people say it will be much closer to 6 million bales. Now we're not trading that number yet — we're not sure we believe it. But, if it is only 6 million or 6.5 million or 7 million bales, China will be forced to import more cotton.”
The other side of the equation is whether China begins to conform to World Trade Organization or WTO rules as it promised to do as a condition of its joining the world trade body. That agreement includes the establishment of tariff rate quotas that will open the Chinese market to more imports beginning in January.
“It will take intense pressure from the U.S. government, the WTO and other countries to get China to conform to the WTO rules,” said Dunavant. “They have been very good at circumventing those regulations.”
But the key may be the potentially lower stocks numbers. “USDA is forecasting that China will consume 26.1 million bales of cotton or more than three times what the U.S. textile mills will consume,” he said. “If China's stocks drop to 6 million bales, they cannot sustain those operations.”
In recent weeks, Dunavant Enterprises has sold 40,000 bales to China for August-December delivery. “That's the first time they've been that aggressive in buying cotton in some time.”
In another possible reflection of a shortfall in cotton supplies, prices at China's weekly cotton auction have risen from the equivalent of 51 cents per pound for base staple and quality to 58 cents per pound, he said.
China's stock reductions are occurring because of increased spinning and flooding in some growing areas. But other U.S. competitors are also experiencing problems.
Australian growers are suffering through a drought. “They just harvested 3.25 million bales,” he said. “Our people say that unless they begin to receive rains over the next few months, next year's production could drop to 2.2 million bales.”
India and Pakistan are expected to produce 1 million bales less than last year because of problems with the monsoon rains but could consume 300,000 bales more than the previous year. The Central Asian countries (Uzbekistan, Tajikistan, etc.) are also experiencing production difficulties.
“World stocks are getting tighter, tighter, tighter,” said Dunavant. “But stocks in the United States are not. Based on USDA's estimates of an 18.4-million-bale crop for 2002 and a slight increase in domestic consumption, carryover is expected to decline from last year's 7.6 million to 7.1 million bales. That's still a lot of cotton.”
That's also why December cotton futures have not risen to significantly higher levels given the world cotton situation. Although 52 cents is much higher than the prices of recent months, it would still only take producers back to the U.S. loan rate.
It's also why merchants won't be beating down growers' doors in the near future. “Merchants have purchased a lot of equities in old crop cotton that they have to work through, and that's why you won't see much interest in new crop until late November or early December,” he noted.
Another potential detour on the right to higher prices could come from the commodity funds, who are currently 37 percent long in New York futures. “If the commodity funds blow out of their positions, the market will drop,” he said. “The low end of my range (44 cents) could even be tested tomorrow given the close below 45 cents in December today.”
Dunavant said he intends for his company to be long if the market goes below 44 cents.
“I think the market will go higher eventually, and the situation in China could impact how soon that happens.”