Writer: Tim W. McAlavy, (806) 746-4051,t-mcalavy@tamu.edu
Contact: Dr. Carl Anderson, (979) 845-8011,canderson@tamu.edu
LUBBOCK – Texas cotton producers received some “market friendly” news in the U.S. Department of Agriculture’s recent Crop Report. The good news of a smaller-than-expected U.S. crop was tempered by large carryover stocks, said a Texas A&M University cotton marketing economist.
“USDA’s first 1999 field survey of crop production pegged the cotton crop at an estimated 18.3 million bales (all types of cotton). That’s 400,000 bales less than last month’s estimate,” said Dr. Carl Anderson of College Station, Texas Agricultural Extension Service cotton marketing economist. “Even so, the latest production estimate is 4.4 million bales larger than last year’s 13.9-million bale crop. More importantly, private sector production estimates were running as high as 19 million bales before the Aug. 12 report.”
USDA projected a 1999 average yield of 649 pounds, slightly higher than last year’s below-average yield of 625 pounds but lower than 1997’s 673-pound average yield.
Estimated domestic use dropped slightly to 10.5 million bales because of weak consumption. This is in line with 1998 usage but well below the 11.35 million bale mill use seen in 1997, Anderson said.
“USDA also reduced carryover stocks 300,000 bales to 5.7 million bales, but stocks are still too large to sustain a market rally,” the economist said. “However, reduced stocks should help hold December futures above 50 cents per pound even though farm prices are likely to remain well below the loan rate.
“If a smaller U.S. crop and a 500,000-bale projected decline in China’s crop causes the A Index to rise from around 51 cents, the adjusted world price (AWP) will rise and the loan deficiency payment (LDP) will shrink. Thus, the farm price plus the LDP or equity payment will preferably remain around 58 to 60 cents per pound.”
The latest world cotton estimates point to lower production and carryover stocks than in July. Estimated world production of 87.9 million bales is 1.3 million bales below July’s estimate, due to lower expectations for the Chinese, U.S., Uzbekistan and Argentine crops. At the same time, world carryover stocks remain very large at 42.3 million bales only 1.1 million bales less than last month’s tally.
“Carryover stocks totaled 35.7 million bales in 1995, when the A Index averaged 85.6 cents per pound. And USDA still expects this year’s crop to exceed consumption by about 1 million bales,” Anderson said. “Texas upland cotton producers are expected to bring in 5.3 million bales from 5 million harvested acres, with an average yield of about 509 pounds per acre. That’s substantially higher than last year’s drought reduced 3.6 million-bale Texas crop.
“Alabama, Arkansas, California, Georgia, Louisiana, Mississippi, Missouri, Oklahoma and Tennessee also have good harvest prospects, compared to last season.”
Anderson noted, however, that USDA’s latest production estimates are based on Aug. 1 growing conditions. Hot, dry weather in several states since then could mean an even smaller crop, he said.
“If Congress approves Step 2 funds in September, cotton disappearance could increase. As a result, the big speculators who for a long time have been selling more futures than they have been buying may become less bearish,” Anderson noted. “That could mean that the bottom in December futures has already occurred. Still, I believe the road to price recovery above 60 cents will be long and bouncy.”
Only 5 percent of the U.S. crop had been forward contracted as of Aug. 1, the smallest amount since the low-price year of 1992. That means the Commodity Credit Corp. (CCC) will continue to be an important marketing vehicle for producers, the economist said.
“If you decide to sell cotton and accept the loan deficiency payment, consider buying an out-of-the-money call at 2 to 3 cents per pound on the July, 2000 contract,” Anderson said. “This will allow you to benefit from a significant market rally without paying storage costs, and guard against even lower market prices.”
Producers and others who are interested in the cotton market can access Anderson’s Cotton Market Comments monthly newsletter on the Internet (http://agecoext.tamu.edu/commodity/cotton/list.htm).
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