The 1999 crop year has been one most growers would like to forget. Low yield, poor grade, and low price have taken their toll on many growers. Will the next crop season hold more of the same or will the situation improve?

Despite disappointing prices for the second year in a row, there are signs that the cotton market is beginning to make a slow recovery. Most notable is that world cotton consumption, after falling 4% during the 1998 crop marketing year, is forecast to improve 3.3% during the 1999 crop marketing year. While consumption is still below where it needs to be, any improvement is welcome news. Economies of southeast Asia are showing improvement and should eventually aid in the rebound.

Production in major foreign exporting countries increased in 1999 but most of that was attributable only to increases in former Soviet Union states. Chinese exports, although China is not a major exporter, are expected to increase dramatically this season. China's production is down by 1.7 million bales from '98 crop levels and it's stocks are declining.

World cotton stocks are expected to decline slightly but the level of stocks will still remain on the hefty side at 47% of use. Again, an improvement but far from being bullish.
 

Acreage and Exports Are Key Components For 2000. Looking ahead to the 2000 crop year, again there are several potentially positive signs. Step 2 funding has been restored and it is expected that this will aid in the recovery of US cotton exports. Also, with low world prices for a second consecutive year, there is a possibility that foreign acreage and production will decline.

There is some possibility, however, that Step 2 could backfire (or at least not have as much positive impact as we would like). There have already been rumblings on the international scene that other countries, to the extent possible, may try to lower price to remain competitive with US prices and Step 2 certificate values. If this were to happen, it would take away from US exports and retard prices but would keep the A-Index down and cotton LDP up.

In my estimation, the price outlook for the 2000 US cotton crop hinges largely on (1) the level of US exports and (2) the level of US acreage and production.

Unfortunately, the outlook is "cautiously pessimistic". The market (currently 56 to 57 cents December 2000 futures) would seem to be sending a signal to producers to curtail acreage. Yet when one considers the equally dismal price and profit prospects of alternative crops and considering the likelihood of a large LDP on cotton again for 2000, the choice of most growers may well be to continue cotton at or near 1999 levels. Therefore, the very thing (POP or LDP) that has been beneficial to growers may also work to the grower's detriment.
 

1999 Supply/Demand and Prospects For 2000. The 1999 crop, first estimated by USDA at 18.3 million bales, is presently forecast at 16.5 million bales (USDA, November 10). Production has been trimmed by drought in the Southeast and hurricane/flood losses in the Carolina's. Yield is forecast at only 592 pounds per acre compared to 625 last year and 673 in 1997. Despite the low yield, production is 2.6 million bales above last year due to a significant increase in plantings in '99.

Exports are expected to improve from 4.3 million bales last year to 5.7 million bales this year. This is still 1.8 million bales below the level of the 1997 crop year. Use of cotton by US mills is expected to drop for the second consecutive year. In all, ending stocks (the amount of cotton left over after use) are expected to increase to a whopping 4.6 million bales- the largest level since 1993.

Large US stocks, improved (but still weak) foreign demand, and increased production in foreign exporting countries has kept the lid on prices this season. The world price (A-Index) has plummeted to it's lowest level since 1986.

Of major concern also is US mill use. After years of uptrend, mill use has now declined 2 consecutive years. The decline is due largely to a dramatic increase in imports of foreign textile and manufactured goods in recent years and competition from man-made-fibers. Combining exports and mill use, total off-take or demand for US cotton is down roughly 3 million bales from the best levels of recent years.
 

Imagine where this market would be had USDA's August forecast on 18.3 million bales actually been realized. We need to keep this in mind when looking at the price prospects for 2000. Although cotton prices are relatively low at present (56 to 57 cents/lb December 2000 futures) when we consider that prices for other crops are just as dismal if not worse and considering the likelihood for another POP or LDP on the '00 crop, it is very likely that US cotton plantings will remain at or near '99 levels.

The following table shows the 2000 crop ending stocks that would result based on how many acres are planted and total demand. This assumes a harvest of 92% of acres planted and an average yield of 635 pounds per acre. This would be the average for the past 5 years.

If acreage and demand were to remain at 1999 levels (14.6 million acres planted and roughly 16 million bales total off-take), ending stocks would increase to 6.37 million bales. The most likely scenario, however, is that acreage will decline somewhat and that demand (most notably exports due to Step 2) will improve. For example, if plantings decline to 14 million acres or less and total demand improves from 16 million to 17 or 18 million bales, then ending stocks would remain near or slightly below 1999 crop levels.
 

The price outlook for the 2000 crop, therefore, is somewhat pessimistic. In my opinion, forward contract opportunities will hinge on (a) what price on December futures will be needed to coax enough acreage to be planted and (b) the level of mill use and exports for the remainder of the '99 crop year. Regarding point (a), the highest level of December '99 futures during the 1999 crop planning/planting season was 59 to 62 cents per pound during March-May. Regarding point (b), US mill use has been struggling but exports have picked up in recent weeks.

Because the prospect for prices at or below the loan rate does exist for the 2000 crop, producers will have to carefully evaluate and consider opportunities to lock in prices when levels of 60 cents or better are reached. As last year, some method of locking in a floor or minimum price while at the same time leaving open the prospect for doing better should that opportunity arise, would seem to be a good strategy.
 

The Importance of the A-Index. The A-Index is the "world price" of cotton. It is the price for Color 31/Staple 35 cotton delivered to northern Europe. Without going into the specific calculation or great detail, the A-Index is important for 2 reasons- (1) the Index and US prices tend to move together and (2) any POP or LDP is calculated from the A-Index.

Currently (mid-November), the weekly average A-index or world price is 46.69 cents per pound. The formula for calculating the weekly POP or LDP is shown below:
 

Weekly Average A-Index  (11-5-99 through 11-11-99)	46.69
Adjustment to US location and grade	-14.14
Adjusted World Price (AWP)	32.55
US Average Loan rate	51.92
LDP (Loan minus AWP)  (11-12-99 through 11-18-99)	19.37

The availability of a POP or LDP is solely dependent on the world price or A-Index. Assuming the location and grade adjustment stays roughly the same, the world price must improve to about 66 cents per pound in order to not have a POP on the 2000 crop.

The A-Index is sensitive to many factors so it is difficult to predict it's direction. Historically, an A-Index or world price in the mid 60's or better has been associated with world supply/demand conditions not much different than the present. The level of the A-index (probably) has a great deal to do with who has cotton to export, how much, and pricing policies of certain countries. The Index is currently at it's lowest levels since 1986. It is hard to envision the world price being able to improve by roughly 20 cents over the next 12 months unless the US crop is curtailed sharply, unless China's export policies are changed, unless there are production shortfalls in other major exporting countries, and/or unless world demand improves markedly. Therefore, a POP is likely on the 2000 crop.

The graph below illustrates that US prices and the A-Index tend to move together. During the 1998 crop marketing year and the '99 season thus far, New York cotton futures prices have averaged about 2 ½ to 3 cents per pound above the A-Index. Should the A-index improve to the mid-60's level the POP or LDP would go to zero but futures prices (hopefully) would move up with the improved A-Index. It seems as though some combination of cash price plus LDP of 65 cents or better would be in the offering for 2000- similar the '99 crop.

2000 Crop Pricing Strategies. December 2000 futures as this writing are 56-57 cents per pound. The question is how high(er) does December need to get to coax enough cotton acreage to be planted? The answer, depending on how demand is doing over the winter months, is maybe not too much higher.

During the March to May planning/planting period last season, December futures ranged mostly 59 to 62 cents per pound. The current level of December '00 futures offers little or no incentive for the producer to do anything. Should December make a run at the 60 cent level or better, however, that will be the producers first serious pricing decision.

Perhaps the best strategy to take with the 2000 crop would be to consider some method of setting a floor under price while still leaving the opportunity to fix price if the market moves higher. The level at which to set the floor should, obviously, be above the loan rate.

Various tools can be used to set a floor. These include a "minimum price" contract, a futures Put Option, or a "forward option to purchase" contract (a contract that guarantees the loan rate plus some amount of equity).

The following illustrates how to calculate the floor or minimum price offered by a Put Option.
 

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