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Economist thinks maybe: Is 70 cent cotton possible for December?

Seventy cent cotton. Now there's a phrase you haven't heard in a while. And might not again any time soon, but the potential for cotton trading in that range on December 2003 exists if the stars align correctly, exports fall into place and the market gets a bit of a weather scare in season.

“The good news is that the noose is tightening on available supplies around the globe,” says O.A. Cleveland, cotton economist.

Cleveland addressed a group of media representatives during the Beltwide Cotton Conference in Nashville and named the bulls and the bears that will influence prices for the next few months and into 2004.

He said in the near term, March contracts could slip, but May and July should see a push, 4 cents to 6 cents higher. “We could see 64 cent cotton in July without much difficulty,” he said.

“It could go higher, but I can't see it yet. December new crop could be up 4 cents to 6 cents with a price floor from 55 cents to 60 cents. A ceiling could range from 65 cents to 70 cents. We haven't heard the prospect of 70 cent cotton in a while.”

The caveats to bumping that ceiling, he said, include export sales of 10 million bales, which is short of early USDA estimates. “Then, we could get a rally on any weather problems.”

He expects POP payments for 2002-crop cotton to range from 5 cents to 7 cents a pound. Counter-cyclical payments should hit 11 cents. “That's a lock,” he said.

“For the coming season, CCP will range from 6 cents to 9 cents, if current projections hold.”

He said Step 2 certificates will run 2 cents per pound for another two months. “That will help exports and domestic mills.”

Cleveland also commented on a “white crisis” affecting cotton across the globe. “No one can find white cotton,” he said. “Australian production is down 50 percent and that will drive prices (for high quality cotton) higher.”

“Mills want FiberMax cotton or high quality fiber. They are demanding length and strength and consistent mike.”

Cleveland said a number of both bullish and bearish factors will affect cotton prices over the next 12 to 18 months.

The bears:

World prices are at historic lows and significantly below the cost of production in many countries. Consequently, acreage expansion is unlikely.

Even though the wheat and coarse grain stocks-to-use ratio is the lowest in years, an increase in cotton prices could limit grain acreage expansion in the United States.

In 2002/03, world consumption will exceed production by 6 million bales. The stocks to use ratio is the lowest since 1994/95. Prices that production year hit $1.15 per pound.

“We don't see the fundamentals for that kind of increase,” Cleveland said. But projections for 2003/04 indicate a lower stocks-to-use ratio.

Production and/or delivery and quality problems in the United States, Central Asia and French West Africa could push the A Index price up.

The U.S. cert stocks are attractive and should begin to move and disappear in five months.

The Australian crop is significantly smaller.

Mills must buy or fix price on substantial quantities of cotton before the 2003 crop harvest.

China will be a larger importer of cotton as stocks decline and mill use expands.

The weaker U.S. dollar makes cotton attractive to foreign mills.

The increase in commodity prices will encourage speculative money into the markets as the stock market stumbles. Investors will pull money out of the stock market and will be looking for investment opportunities.

U.S. growers are not selling the 2002 crop and are sending it to the loan.

Merchants are buying strong basis, an indication of a strengthening market.

Growers can't fix a price on 2003 crops because they don't know what POP and CCP will be. Growers are waiting for 65 cents December cotton.

U.S. export prices are competitive and the foreign production/consumption gap is 19 million bales, the second largest on record. Exports are extremely strong, maybe not strong enough to hit the 10.8 million bale forecast, but still strong.

And now for the bears:

The U.S. and world economies are not showing signs of recovery. Speculators in cotton are 40 percent long and are taking profits.

Too much dependence on China could catch markets with too much optimism. Cleveland said the United States expects to move 1.5 million bales to China.

“If we don't, prices may not rally. But China makes inquiries every night.”

Higher planting costs could push cotton prices up and use could shift to polyester.

U.S. ending stocks for 2002/03 stand at 6.5 million bales. Cert stocks are at a record level and farmers will eventually have to sell their production.

Cleveland anticipated little affect on cotton markets from a war with Iraq, “if it's a quick war or if an occupation is of relatively short duration.”

He said the Korean challenge appears to be more political and expects a diplomatic settlement.

“A more important factor is the economic crisis in the United States,” he said. “That can be devastating. We need consumers to take cotton textiles off the shelves.”

Cleveland said market signals indicate that the decline in U.S. mill consumption has bottomed out. “It's not certain and may take another two months of data to be sure.”

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