WASHINGTON--Analysts are being cautious in their estimates as to how much raw cotton prices will drop, even though last week's Agriculture Department forecast of a record 1994-1995 U.S. cotton harvest sent prices significantly downward.
They say even if the government's predictions are borne out, the voracious worldwide textile mill demand for cotton will keep already high prices from declining precipitously.
Furthermore, if China, Pakistan or India's cotton crop is beset by pests or bad weather, as they were last year, prices may rise as mills worldwide dip into already lean cotton reserves. The three countries produce roughly two-thirds of the world cotton crop.
"I am looking for a low of 64 cents," said Judy Ganes, a Merrill Lynch cotton analyst, regarding cotton futures for December contracts. "Prices will really hinge on production in China and Pakistan. If there is a tighter global balance, you're going to see the prices go higher, not lower."
Following the upbeat USDA report issued last Thursday, spot cotton prices on the New York Cotton Exchange began falling, dropping 2 cents a pound on Friday and again on Monday to trade at 67.27 cents a pound. Under exchange regulations, 2 cents is the maximum daily drop set for the commodity over the first two consecutive days of declines.
"Falling the limit two days in a row is extraordinary," said Terry Townsend, a statistician for the International Cotton Advisory Committee, a coalition of cotton users and various government agencies.
On Tuesday, though, prices began to recover and at Wednesday's close, the price was 68.93 cents.
The USDA forecast came at a time when prices had been gradually declining since the 12-month high in March of 87 cents. That decline reflected anticipation of a positive 1994-1995 cotton crop report and the fact that mills had made it through a year of tight cotton supplies without depleting reserves.
Still, prices are well above the 12-month low of 54 cents in October 1993, a figure that doesn't seem likely to be repeated.
As it stands now, worldwide cotton consumption for the current crop year, which runs Aug. 1 to July 31, is forecast to be equal to production, or 87 million bales, up from last year's 85.5 million. Given that there may be less cotton harvested or more used, mills are expected to tap into cotton reserves, which this crop year are forecast to decline to 28.45 million bales from last year's 29.68 million.
Cotton supplies in the U.S., specifically, aren't expected to be as tight. Of the 19.2 million-bale harvest the USDA is forecasting for this year, textile mills are expected to use 11 million bales, with growers exporting 7.3 million. The remaining will go toward bolstering reserves by just under a million to 4.6 million bales. Last year, 16.2 million bales of cotton were produced, while U.S. mills used 10.4 million bales, growers exported 6.9 million bales, and reserves ended the year with 3.5 million bales.
"Prices are going to be attuned to weather, export demand and the fact that mill use of cotton in the U.S. is running at its most rapid pace since World War II," said Sandy Kaul, a Smith-Barney cotton analyst, stressing the preliminary nature of the USDA forecast and how last year the cotton crop of 16.2 million bales fell well short of the agency's initial August prediction of 18.6 million bales.
Kaul also sees cotton prices hovering at 60 to 65 cents for the remainder of the year.
Forecasters will have a clearer picture of this year's worldwide cotton harvest in February and March, when China's, Pakistan's and India's crops mature, said Townsend.
Another wild card will be how much cotton is consumed by Chinese mills, which are the world's largest users, followed by the U.S. This crop year, China is expected to use 21 million bales, which forecasters say will require importing 1.4 million bales and tapping into reserves, since its own harvest is expected to produce only 19.5 million bales. Last year China used 20.7 million bales and in the 1992-1993 crop year, its mills consumed 21.5 million bales.
"China continues to buy cotton, and its purchases are highly correlated with cotton prices," Townsend said.
But even if China and other countries lean on the U.S. to make up for cotton shortfalls, U.S. mills will be in good standing as far as supplies, said Russ Barlowe, an economist with the Agriculture Department's World Outlook Board.
"We have a very large supply of cotton. We have enough to not only supply foreign markets, but domestic use as well," Barlowe said.
"That places us in a very good position."
--Fairchild News Service

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