Writer: Tim W. McAlavy, (806) 764-4051,email@example.com
ORLANDO, Fla.– Cotton producers and the entire cotton industry are unlikely to see any substantial recovery in cotton prices until the 2000-2001 marketing year, said William B. Dunavant, chairman of the board and chief executive officer of Dunavant Enterprises, at the 1998 Beltwide Cotton Conference recently.
“I cannot remember a time in my career when all segments of the industry were under the financial strain that we’re experiencing today,” Dunavant said. “And unfortunately, I cannot see a light at the end of the tunnel until at least the 2000-2001 marketing year.
“This is a year of flat exports, disastrous fiber quality and low prices. The Asian financial crisis has hit our shores in the form of cheap textile imports–imports that are cutting into domestic consumption and depressing prices.”
A 13.7-million bale U.S. crop, domestic consumption of only 10.4 million bales and exports of only 3.9 million bales to date leaves little hope for higher short-term prices, he said.
Lowering world carryover stocks remains the key to higher prices, Dunavant said.
“We began this marketing year with world carryover of 38.9 million bales. We (Dunavant Enterprises) believe world production will come in around 83.4 million bales and that world consumption will amount to 83.9 million bales,” he said. “ven if we can reduce U.S. carryover stocks from 3.9 million to 3.7 million bales, it won’t be enough to move prices substantially higher. The key to higher prices is getting China to permanently reduce its cotton stocks.
“At the same time, we must remain competitive with other major cotton exporting nations such as Australia and Argentina. And we must strive to improve our market share (sales) to countries such as Monaco and Turkey. If our (Dunavant) figures pan out, world carryover should drop from 38.9 (million) to 38.4 million bales during this marketing year–a step in the right direction.”
Dunavant expects U.S. cotton acres in 1999 to total about 13.2 million acres with total production of about 17 million bales. He also looks for 1999 domestic consumption of 11 million bales and exports of about 5.5 million bales.
“But to achieve that export level and put some support under next year’s prices, we need to reopen farm bill discussions this spring on Capitol Hill and push for retention of the cotton marketing loan, year-long Step 2 export enhancement funding and revised Step 3 import regulations,” he said. “Until we can achieve that, foreign supplies will continue to cap prices.
“I believe that world prices have bottomed out and stabilized, but I don’t look for a major old-crop price rally in the near-term– probably no more that 2 to 3 cents, at best. Without revisions to the farm bill, the new-crop price outlook doesn’t look very bullish. I wouldn’t advise any producer to hedge his new crop at today’s prices, certainly not until the market hits 68 cents per pound.”
If no changes in the farm bill emerge this spring and growing conditions remain stable, producers should strongly consider buying out-of-the-money puts (cotton options) as part of their marketing plan, he recommended. If new Step 2 export enhancement funds are included in farm bill revisions, Dunavant said, owning out-of-the- money calls would be a wise marketing strategy.
“The financial subsidies that competing nations enjoy and employ have us and our prices down on the ropes right now,” Dunavant said. Still, I believe a long-term price recovery will occur–probably in the 2000-2001 marketing year.
“Meanwhile, we must remain united. I urge your continued support for a strong National Cotton Council that serves all sectors of the U.S. cotton industry–history has shown that we can accomplish much in Washington and abroad if we work together to achieve a free market environment.”