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Memphis merchant says: Multiple factors depress cotton prices

Cotton prices likely will not budge above 35 cents anytime soon as the United States and other major producers work off large inventories and reduce acreage to bring production closer in line with world demand.

Too many factors weigh too heavily on the entire cotton industry to expect a rapid turnaround, says Memphis cotton merchant William Dunavant.

Dunavant, speaking recently at the Texas Gulf Coast Cotton Conference in Corpus Christi, said as many as 10 negative factors currently affect cotton markets.

“In my 50 years as a cotton merchant, I've never seen 10 factors affecting cotton prices in the same year,” he said.

Those influences include:

  • A large carryover from last year.

  • The 2001 U.S. crop will be near 20.1 million bales.

  • Worldwide production also is up.

  • A significant and unexpected downturn in the U.S. textile industry was largely brought on by increased import pressure.

  • A textile industry with high fixed prices is still spinning some relatively high priced (50 cents to 60 cents) cotton.

  • The world textile industry has slowed.

  • U.S. farm programs encourage over-production and low prices

  • Certificated stocks on hand for one to three years will hang over the market and stifle price rallies.

  • Merchants face marketing problems with uncertain letters of credit and broken contracts.

The Sept. 11 terrorist attack has created a feeling of uncertainty.

Dunavant said the large U.S. and world crops, added to already burdensome carryover stocks, would take time to work down. Adding to the problem is the “decimated U.S. textile industry,” Dunavant said. “I don't see the USDA estimate of 8 million bale domestic use,” he said. “A 7.8 million-bale figure is more likely.”

Exports should top 9 million bales. “We've already registered more than 7 million; that's a big number for this time of year,” Dunavant said.

But much of that cotton may never be delivered, he fears. “That could mean a $100 million loss to the industry.”

Dunavant said the domestic and export demands add up to around 17.2 million to 17.5 million bales. Added to last year's 6 million-bale carryover, the industry may see an 8.8 million to 9 million-bale surplus from the 2001 crop year.

Worldwide, production could hit 95 million bales compared to only 88 million last year.

World consumption, Dunavant said, is estimated at 91.3 million bales.

Largest producers are China, at 23.5 million bales and the United States at 20.1 million.

“The Southern Hemisphere seems to have gotten the message,” Dunavant said, “and cut production. But their reduction is not nearly enough (to offset increased production in other areas), and consumption increased only by 300,000 bales.”

Dunavant said U.S. acreage for the 2002-2003 crop likely would drop to around 14.4 million. Production could top 18.4 million bales. He said domestic consumption could increase slightly, but carryover still will be large.

“The one hope is that prices will get so cheap, down in the mid-20 cent range, that China will buy cotton (perhaps 2 million bales) to build strategic stocks. That's still not enough to relieve the problems, but it would be a start.”

Dunavant criticized U.S. farm policy as encouraging over-production and low prices but admitted that the loan deficiency payment has been “a lifesaver for cotton farmers.”

He said in any new farm legislation “a marketing loan and Step Two will be critical.

“But it is ludicrous for the government to encourage increased production. If that continues, we'll probably see carryover greater than 10 million bales. If we have 9 million bales in the loan next year, expect depressed prices.”

He's also critical of the farm insurance program that “creates a number of ways to make more money by producing less rather than more. It should not be that way and needs correction.”

Dunavant said, as a merchant, he should be pleased with overproduction. “But it just doesn't seem the right way to look at the future.”

He would prefer to see a farm program that includes conservation reserve. “But farmers should get paid big time for idling acreage,” he said.

Dunavant said several factors continue to damage the U.S. textile industry. “I'm concerned about trade concessions to Pakistan,” he said. “Trade concessions will mean pressure on the U.S. textile industry. The WTO will add more pressure.”

The situation demands attention, he said. “The textile industry is critical for the long-term stability of the U.S. economy. If all our fiber comes from off-shore, we will be in a bad position.”

Dunavant praised south Texas cotton farmers for finding ways to increase the value of their crop.

“Farmers in this area are planting better varieties,” he said. “The starting place for higher quality is variety selection.”

He said south Texas had been a leader in adopting FiberMax cotton with improved staple, mike and strength.

Dunavant says the cotton industry faces an uncertain future. “A year ago, we believed China would be buying cotton, and we did not foresee the severe erosion in the U.S. Textile industry. Cotton is very cheap.”

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