As attractive as current prices might be, cotton producers should be patient in fixing new crop cotton prices, William B. Dunavant Jr. said in his annual comments to the Mid-South Farm and Gin Show in Memphis.
Dunavant, chairman and CEO of Memphis-based Dunavant Enterprises, Inc., told Mid-South Farm and Gin Show attendees that even with the market hovering around 68 cents, “prices still have an opportunity to go higher. Buying puts is an intelligent mechanism particularly this year.”
Anticipating the question on many growers' minds, Dunavant said last fall's decline in cotton prices occurred because commodity funds, speculators and even merchants were long in the market, “and when people started selling, there was nobody to stop the market.
“How prices went from 86 cents to 65 cents is beyond my comprehension, but it happened,” said Dunavant, who said he would forego any “funny” stories for this year's presentation because the past few months had not been much fun. “Today, commodity funds and speculators are about 7 percent long. The ingredients for a rally are right there for the remainder of the season.
“Can you imagine the scenario with prices if one major producer had a shortfall this season. We wouldn't be able catch prices, they'd move so fast. It may not happen, but we need to recognize that with Brazil on our case every day, that if something would happen in the WTO that would alter the farm program negatively, that would restrict cotton acreage. That would again be bullish on cotton prices.”
Dunavant said that U.S. cotton producers “harvested one of the better crops in the Mid-South and Southeast that I can remember. There was very little high micronaire. We had good staple, good grades and good yields.”
U.S. exports for the 2003-04 marketing year could end up around 13.6 million bales, noted Dunavant. “I believe that they will be greater than that. We have already registered 11.6 million bales, 2.4 million bales higher than a year ago.
“When the smoke clears for this season, I see the U.S. carryover at 3.5 million bales, because I believe more business is about to come.”
Dunavant said the market may have more fireworks later in this marketing year and into the next. (The marketing year runs from Aug. 1 to July 31.)
“The critical time is not today,” he said, “but April through September, when foreign supplies are dwindling and U.S. supplies are dwindling and our carryover is going down. By Sept. 1, the U.S. carryover will be down to 2.5 million bales. So we're going to go through a tight period in the United States and the world.”
Dunavant projected that domestic consumption of cotton will drop from 6.3 million bales this marketing year to 6 million bales in 2004-05.
World numbers for 2003-04 are very friendly, according to Dunavant. “We think production in the world will be 93 million bales this marketing year with world consumption at 97.8 million bales. World carryover on Aug. 1 will be down to 31.6 million bales.”
As to China's announced cotton production of 22.4 million bales for 2003-04, “Those numbers just don't work,” Dunavant said. “We think the number is really 20 million bales and a million of that cannot be spun.”
China will continue to be a major buyer of old crop and new crop for the next six to eight months, said Dunavant. “They are buying high-grade cotton around the world. But the best cotton is about to disappear, and they will run their mills on the next-best cotton. They will be buying many types of U.S. cotton.”
China is expected to announce import quotas for 11.9 million bales of imports in the next few days, noted Dunavant. “They don't put out the quotas unless they intend on using them. Next December, they will release quotas for 2005, about 894,000 tons of cotton. These are reasons why I think the market has the potential to move higher. Of course, the market can pull back.”
Mexico and Turkey also continue to be strong customers of U.S. cotton, noted Dunavant. “Turkey has already registered 1.08 million bales of U.S. cotton. Mexico has bought 1.6 million bales.”
Cotton production should return to more normal levels in Australia, according to Dunavant. “The drought is broken. There is water in the dams. We expect them to produce about 3 million bales.”
For 2004-05, Dunavant projects U.S. cotton acreage at 14.3 million acres, a little less than National Cotton Council figures. “We think the price of soybeans and corn is going to take some cotton acreage. That will produce a crop of 18.3 million bales.”
It's too early to tell where exports might head next marketing year, according to Dunavant, “but we're calling it a minimum of 12 million bales. That gives us a 4.1 million-bale carryover for 2004-05. That's not a bearish number, but these are only projections. A lot can happen over the next year.”
Meanwhile there will be a sharp jump in world production to around 103 million bales for 2004-05. “On the surface that looks negative, but we see world consumption going from 97.8 million bales to 99.2 million bales, triggered by continued increases in Chinese consumption.
World carryover would move up to 35.8 million bales, “not a bearish 68-cent number at this stage. China is going to sharply increase production, to 28.5 million bales. Their consumption is going to increase from 31.5 million bales to 32.5 million bales.”
Chinese imports will still be strong at 5.5 million bales, but that's down from this year's 9 million bales. “They have to balance their carryover stocks with the volume of consumption that they have. India, Pakistan and Turkey will all increase consumption next year.”