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2003 Cotton Market Update and Outlook Presentation
to the Ag Market Network Don
Shurley
Department of Agricultural and Applied Economics University of Georgia |
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In
the Southeast, again the Georgia crop looks very good at this point.
The North Carolina crop has been hampered by more rain than Georgia
and the Alabama crop doesn't look as good as the Carolina or Georgia
crops. Our acreage here in Georgia will likely be above the 1.45 million
acres estimated in USDA's March Prospective Plantings number. I
want to concentrate my remarks today on the 2003 crop price outlook.
If you are like many of our growers here in Georgia, we feel like we
let a good opportunity slip away if we failed to do anything when December
was over 60 cents just a month or so ago. Now, the question I think
that is on many growers mind is "will I get that opportunity again?" December
futures prices have rallied significantly this week- picking up over
3 cents per pound. December closed yesterday at 5956 so we are again
inching close to the 60 cent mark. In my mind this is an important barrier.
Previously, the market challenged 60 cents for a while but just couldn't
break through. When we did, December went to around 63 cents very briefly
before falling back below the 60-cent level. So again, I think 60-62
cents is important from both a technical and market psychology standpoint. The size and condition of this year's US crop has, in my opinion, not yet been fully factored into the prices we are seeing. USDA currently has the crop pegged at 17.2 million bales but that is based simply on historical averages... based on 14.25 million acres planted (USDA Prospective Plantings, March 2003), a 10% historical average abandonment of acres planted, and a 640 lb trend yield. I understand and have seen reports on the condition of the crop in the Texas plains. This may be significant once it is determined if these acres can be replanted. I understand that the crop insurance deadline has passed, thus the window is closing fast if not already. USDA already has 1.35 million acres of abandonment built in to it's current forecast- so one could reasonably argue that some Texas abandonment is already built in because some acreage in Texas is abandoned every year and thus included in historical percentages. So acreage abandonment in Texas will certainly have some impact on price but may not be as large a factor as one would think. The crop is also off to a slow start in the Mid-South and California. Overall, the condition of the crop is on par with or a little better than last year.I don't want to bore you with a lot of numbers but it is important to highlight just a few significant factors in the current supply and demand picture so that you have a broad view of what is going on. First of all, according to USDA's June report we will begin the 2003 crop marketing year with roughly 1 ½ million bales less cotton on-hand that last year. This is due to the smaller crop last year and a record level of exports. Second, USDA is currently projecting a 17.2 million bale US crop for 2003 and another record of 11.5 million bales of exports-- if this is realized, remaining 2003 cotton on-hand when we start the 2004 marketing year would be only 4 ½ million bales... the lowest level since 2000 and the smallest US stocks-to-use ratio since 1999. So, this certainly seems bullish. Perhaps, at least in my mind, the most dominating factor in the market right now is the phenomenal growth in the world demand for cotton. Demand has set new records each year now for the past 3-4 years. Although the US textile industry has declined greatly, expansion in China and other foreign countries has been tremendous and this has lead to much higher US exports. The gap between foreign production and mill use has been widening and the US has been able to fill that void. For 2003, USDA is projecting foreign demand for cotton to be about 92 million bales. This is a little over 1 million bales higher than last year and about 5 million bales more than 2 years ago. There is no doubt that US exports are another key to the 2003 price outlook- and this worries me that perhaps USDA estimates are optimistic. The worldwide demand for cotton, while at record level, has no doubt slowed and foreign production is expected to increase by about 8 million bales from last year's level. So it would be quite an accomplishment if the US can again export 11+ million bales of cotton. USDA's June estimate dropped 2003 forecast foreign production by 1 million bales from the May estimate so this makes me a little more comfortable, but still cautious, about the high export number. I don't look for 2003 prices to take a nose-dive. At present, the economics look positive and supportive of price. Nevertheless, I still think it would be good risk management to consider contracting a portion of the crop at something over 60 cents and then be prepared to re-own with Calls if the market appears to move higher or simply purchase Puts if the market moves over 60 cents. At current price levels, any LDP or POP on the 2003 crop would appear minimal-- perhaps in the neighborhood of 3-4 cents. The CCP will be mostly impacted by market prices during the November-February period. Looking at the level of futures prices at the present and if prices remain at current levels, the 2003 CCP would likely be in the neighborhood of 8-10 cents. |
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