Beltwide '06: O.A. Cleveland Expects Narrower Pricing And Continued Shifting Toward Exports

U.S. prices will probably be in a somewhat narrow range for 2006-07, O.A. Cleveland said Thursday during a marketing conference at this year’s Beltwide Cotton Conference in San Antonio.

Cleveland, an economist and Mississippi State University professor emeritus, aanticipates a price range this year from 48 to 68 cents, a 20-cent difference. Typically, he said, an active cotton market will swing as much as 25 cents between the year’s low and high prices. Specifically, he sees:

• A 2006-07 crop of 21.5 million bales. That’s based on recent yield trends but also factors in droughty conditions in some grower areas.
• Further slippage in domestic consumption, edging downward by 200,000 bales to 5.8 million.
• Relatively strong exports, although the total will fall to 15.1 million bales from last year’s level of 16.4 million.
• World production at 112 million and consumption at 116 million.
  

Don’t count on improving domestic consumption, either this year or in the futureCleveland stressed. “Two years ago we consumed 6.5 million bales domestically. Last season, we jumped to 6.7 million bales as prices were 10 cents a pound lower a year ago, compared to now. We should not expect to see domestic consumption to climb back to 6.5 million and, in fact, we should expect another 500,000- to 800,000-bale reduction by 2010.”

In Cleveland’s opinion, the Step 2 program – billed as a way to save the domestic textile industry – actually hastened what he believes was its inevitable demise. Globalization and U.S. trade policy already were working against the industry, and the Step 2 program sped up the process.

U.S. growers have to reconcile themselves to the fact that they will continue to grow cotton mainly for export, and that will require major shifts in the loan schedule, Cleveland said.

“The historic base, SLM 1-1/16 inch cotton should become a discount grade in the loan schedule, just as it is in the world market. Growers can help themselves through this by aggressively voicing their support for a premium being paid for quality.” This is necessary, said Cleveland, to reorient marketing toward an export-dominated paradigm.

Without changes in the loan schedule, “there is little incentive for the U.S. to move to quality cotton production.” Merchants and co-ops offer only “scant” rewards for quality cotton, preferring to spread quality gains over all growers. It’s a system that the current generation of middlemen inherited, and it hasn’t been changed in nearly half a century, Cleveland added. Growers also has been largely complacent about the system, he said.

China continues to be “the future of cotton.” Globecot – which Cleveland said has had the best track record for predicting Chinese consumption over the last 3 years – estimates that Chinese consumption will climb to 45 million bales this season. It might even hit 46 million bales. “Taking consumption at this level, we must realize that China and the Indian Sub-continent (India, Pakistan) account for 80 million bales of cotton consumption every year,” Cleveland specified. But in that group of countries, only China is a major importer of U.S. cotton.

Uzbekistan is a major unknown, he added. The Central Asian nation is in political turmoil and has come under pressure from both the U.S. House and Senate over political repression. “This is a hot spot that could rock the world cotton industry any day and lead to as much as a 10-cent move to the upside before pausing for a reality check.”

The Farm Bill debate is the “greatest challenge” for U.S. growers in the coming 18 to 24 months. The administration is “intent on cutting support for U.S. agriculture in general and singling out cotton specifically. The cotton industry must take a unified approach in any debate, Cleveland emphasized.