The United States must somehow plant less cotton this spring and whittle down certificated stocks if it expects to see any price rallies, according to Memphis cotton merchant William B. Dunavant Jr.
He told attendees of the Mid-South Farm and Gin Show that he expects U.S. cotton acreage of between 16.2 million and 16.4 million acres this spring. “At 9 percent abandonment, we will harvest about 14.75 million acres and produce a crop of 19.3 million bales this coming season.”
Dunavant projects domestic consumption will be 9.6 million bales and exports will jump to 8.3 million bales. “If those numbers are correct, then our carryover goes from 4.7 million bales to 6.1 million bales. There's no good news in that. The United States is simply planting too much cotton.”
The merchant blames part of the jump in cotton acreage on the new crop insurance program. “It is a faulty program. They need to put some kind of teeth in it and maybe they will. But we don't need to plant cotton on land that doesn't traditionally go into cotton.”
The merchant reiterated recent comments that the rest of the world is doing a better job than the United States in keeping supply and demand in balance. “The world is going to produce about 91.5 million bales. Consumption is going from 91.5 million bales to 92 million bales. While the United States is going up in carryover, the world carryover is going down about 200,000 bales, to 34.2 million bales.”
Dunavant projected that China will import 1.8 million bales in 2001-02, a significant increase over the previous year. “Hopefully, the United States and Australia will be the countries that they import from.”
Dunavant expects China to produce 19.5 million bales in 2001-02 and consume 22.6 million bales. That compares to USDA's projections of 20 million bales and 23.5 million bales, respectively. “We see carryover dropping under 10 million bales. That is very encouraging.”
Dunavant says 280,000 bales of certificated stocks are also weighing on U.S. cotton prices. “A recommendation was passed by the board of trade last month to raise the strength from 22 to 25, penalize 4.7 to 4.9 micronaire if USDA has quotations that penalize that cotton, put west Texas quotations into the quotation system and make the north and south Delta one quotation.
“We also recommend that cotton that is two crop years old get additional penalties to move the cotton off the contract. These changes, which will go into effect 18 months after the Commodities Futures Trading Commission approves them, will enhance the opportunity for prices increasing to the upside during good times.”
In the meantime, “for May cotton to have any major move up, we're going to have to sell the certificated stocks. Yes, we have sold some of these stocks, but we need to sell a whole lot more.
“The only other thing that could take May cotton higher is if we in the United States or some other northern hemisphere country have a major problem in April or May and the crop doesn't get planted in an efficient manner. Then December would rally and that would pull up the old crop prices, which are already too cheap.
“Remember, sell certificated stocks, we have a major rally. Don't sell the stocks and we don't have a major rally.”
He added that higher prices “would bring in a flood of cotton producers still holding cotton and wanting the market to go up. So the rally will probably not be long-lived.”
Dunavant says that the projected 6.1 million bale carryover for 2001-02 could be behind current December futures prices lingering around 56 cents. “I think the range for December is 47 cents on the downside and 66 cents on the upside. Weather is going to play a big part in that. Demand in the world and China is also going to play a big part in that.”
Dunavant also encouraged producers to pressure cotton seed breeders to bring better-quality and higher-yielding varieties to the market.
“In Australia, quality and yields are excellent. The characteristics of the seed are much better than in the United States. The FiberMax cotton varieties (which were adapted from Australian cotton varieties) were planted in south Texas last year and produced excellent yields, 30 strength, 35-37 staple, micronaire, 3.8 to 4.2.
“So there are some seed varieties out there that give you everything the markets desire. That's one reason why the Australian farmers are in such strong competition with the United States today.”
U.S. growers have one great advantage, according to Dunavant. “Your cotton is basically free of contamination. That is a real asset. Don't lose it. Our company has been forced to diversify because of the (lower) qualities and the quantities produced recently in the United States. We have been forced to go into other countries and try to market their cotton to sell to our traditional markets.”
The U.S. textile industry is also facing stiff competition, the merchant noted. “We have seen domestic consumption two years ago at 10.4 million bales, slip to 10.2 million last year and this year, 9.6 million bales. We're seeing the domestic industry eroding, migrating to Mexico and Canada.”