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One big blip

Promising 2000 cotton marketing season World cotton market supply and consumption fundamentals say California and Arizona cotton bales should be flying off the West Coast to textile mills, but they are not for basically one reason.

The value of the U.S. dollar is too high, said Calcot Ltd. senior vice president Robert Norris.

Norris told the 19th annual Agribusiness Management Conference in Fresno, Calif. recently that New York futures are up 24 percent from a year ago, but the value of the U.S. dollar pushes that up to the equivalent of 34 percent more compared to the Euro; 41 percent over a year ago in Indonesia and cotton prices are 42 percent higher in the Philippines because of the dollar's value.

To make matters worse, the Australian dollar has fallen by 19 percent, making Australian cotton, which is very similar to San Joaquin Valley cotton, more attractive to Asian buyers.

This drives Australian cotton to equivalent prices up more than 50 percent over a year ago.

This makes the bottom line for the 2000 crop now being harvested a bit "tricky." While the current monetary scenario puts U.S. cotton at a price disadvantage, tightening world supplies and serious quality concerns favor a general rise in cotton prices. Norris said the U.S., specifically export-driven Western cotton, could be in a "fortunate position of being the supplier of choice."

While a major blip, the currency situation was about the only downside Norris offered in his Western cotton economic outlook.

"Today cotton is at a point where a lot of good things can happen if all the pieces fall into place," Norris said. "World cotton consumption should exceed production for the third straight year, drawing world stocks down considerably."

That, he said, should translate to good U.S. cotton exports and since nearly all of the California and Arizona crops are exported, "we expect to play a major role in that scenario."

China continues to be the biggest role player in the cotton market as with many other West Coast agricultural commodities.

China has dumped most of its surplus cotton. By the end of 1998 that amounted to 21 of the 45 million bales held in stocks throughout the world and that drove prices through the floor. That was the bad news. The good news was that the U.S. government's loan deficiency or POP payment hit more than 22 cents per pound because of China-driven low world prices.

"The POP formed a substantial part of grower revenues in the 1999-2000 season," he said.

Now that China has rid itself of surplus cotton, Norris said it is "highly possible, but far farm certain" that China will be back into cotton importing business. If China returned to the buyer side of the equation, "California and Arizona would be an idea candidate for those imports, as we have a long and good relationship with China." Between 1994 and 1998 China imported almost 13 million bales of cotton. The U.S. share of that was 7.5 million bales, "much of that was from the Far West."

China's likely entry into the WTO also would be good for cotton exports.

The situation in China and the general economic recovery in most Asian markets propelled 1999 world cotton consumption to 91.2 million bales, surpassing 1996's record by more than three million bales. For this crop year, USDA projects consumption will go up another 1.5 million bales.

Other nations also are showing good signs of a textile recover. Russia's cotton consumption fell 80 percent after the collapse of the Soviet Union to just under 1 million bales by 1998. In 1999 600,000 more bales were consumed than the year before and more gains are projected for this year.

However, Russia is not a likely U.S. cotton customer. It will get additional cotton from Central Asia, which will take more cotton off the world export table.

Turkey has emerged as a major world cotton importer, consuming 5.4 million bales last year and it is expected to consume that much if not more this season. Almost half of Turkey's 1.9 million imported bales came from the U.Seagain much of it from the Far West.

"Turkey was Calcot's second largest customer last season," he said. The downside to that is that Turkey made liberal use of t GSM financing and the current Administration is threatening to curb repayment terms, making U.S. cotton less attractive.

The export potential for U.S. cotton is "very large," said Norris. The current foreign production-consumption deficit is 13.2 million bales. That represents the total amount of U.S. cotton needed by foreign users without drawing down stocks.

China represents a large portion of that deficit, 4.5 million bales. However, without China the deficit remains at 8.7 million bales. "If the U.S. could supply that market, it would indeed be very good news."

Prices remain lower, however. The reasons are the unstable conditions in the Mideast `the teetering U.S. Stock Market, and the spread in the value of the U.S. dollar compared to other currencies. Norris is not surprised that foreign mill buyers are "extremely cautious about committing far in advance to good-sized purchases."

However, Norris said it is still early in the season "that a lot of things can change for the better."

There are quality and quantity concerns from several U.S. competitors. If they are real enough, "it is only a matter of time before the U.S. becomes the origin of choice, regardless of price, which could lead New York prices could rise into the low 70s."

Prices had better increase to offset the anticipated lower POP payment this season. The current scenario means the POP, now at a nickel, could eventually disappear by early spring.

"If that happens, it is possible that net grower revenues could be lower than last year on a per pound basis because prices may not rise high enough to offset the lower POP," he said.

Fortunately for Western producers, yields are higher this year than last "and that should help the bottom line."

For 2001, Calcot is projecting more acreageeE13 percent more in California and six percent more across the U.S. Cotton Belt. In California, most of that is expected to be in Pima, which Calcot predicts will reach 240,000 acres, 100,000 more than this season. He predicts Acala and Upland acreage would reach 800,000 next season, an increase of only about 25,000 acres.

Overall, Norris said there will more production in the U.S. and the world; prices will continue to struggle, and the POP could increase.

The wild card in 2001 - as in most recent years - is China and its import potential. "China may need to import 2.5 to three million bales, and we believe the U.S. will share in approximately 60 percent of that. With China an importer of that magnitude, prices may not fall very far after all."

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