CHINA KEY TO COTTON PRICES

Byline: Michael McNamara, with contributions from Paul Erhlich, Hong Kong

NEW YORK--While the size of next year's domestic cotton crop will go a long way toward deciding how much U.S. textile mills will pay for the fiber, it's the cotton harvest from China that could be the biggest factor.
Two weeks ago, the Agriculture Department forecast a record cotton crop for the 1994-95 season of 19.2 million bales (one bale equals 480 pounds). This cotton year runs from Aug. 1, 1994 through July 31, 1995. The 1993-94 cotton crop was about 17.4 million bales.
As reported, economists and analysts, however, were wary of making predictions about next year's prices, and executives contacted last week concurred. They pointed out that despite the forecasts, weather and insect infestation can still take their toll.
But perhaps the key factor bearing on the price of cotton next year is the size of foreign harvests, especially in China, where the outlook remains clouded.
Forecasts for the China harvest, which begins next week and runs through November, haven't moved from an initial estimate of 19.5 million bales. Yet the latest reports from China indicate the crop could fall short of last year's 17.2 million bales. Chinese crop figures were supplied by Cotton Incorporated, the research and promotion arm of U.S. cotton growers.
"The price of cotton, historically, is driven by external issues rather than internal ones," said Arthur Wiener, chairman of Galey & Lord, a large user of domestic cotton. "What happens in China, India and Pakistan, that's what's going to drive the price. That's been driving the price the last nine months."
Alfred Greenblatt, president of the apparel and home fashions business unit of Guilford Mills, added, "We're not going to know what we are going to pay until next year, when we find out how the other countries have done with cotton.
"In my opinion," Greenblatt added, "I don't care if it's cotton, polyester or nylon, it's a matter of supply and demand. It's Economics 101."
Executives said the more cotton China grows and sells, the lower the prices. If the crop is small, said executives, look for China to buy large amounts of U.S. cotton, causing prices for domestic mills to rise.
The forecast for this year's China crop is down from the 20.7 million bales harvested in 1992. Last year, China bought about 1.1 million bales of U.S. cotton.
A big reason for China's decreased production has been the bollworm, a pest that devastated its cotton crop last year and currently threatens it this year. "Local governments should put the war against the pest at the top of their agenda," said Liu Chengguo, China's vice minister for agriculture, during a national conference in the key cotton-growing province of Shandong.
The bollworm was largely blamed for the decline in cotton production last year, and it has so far proved resistant to chemical and biological pesticides, he said
Liu stressed that provincial governments should improve the management and distribution of pesticides as well as educate farmers to use them more effectively. However, he also said the bollworms have built up resistance to pesticides since last season and are extremely difficult to eliminate once they infest a crop.
In addition, Chinese officials have said that cotton acreage in China is about 1.5 million acres below its target of six million--despite promises of a 22 percent increase in the price the government pays farmers for their cotton.
These potential shortages--as well as past ones--have Chinese textile mills scrambling to place orders wherever they can get raw cotton supplies, including the U.S. Some are trying to replenish dwindled stocks, while others are buying supplies to avoid a repeat of the crippling shortages they faced earlier this year after a particularly disappointing crop. "We are seeing cotton imports rising, including those from the United States," said one Hong Kong consultant to the Chinese textile industry. "I think China's imports will continue to climb for the rest of the year."
Two other key cotton-producing countries, Pakistan and India, have also seen their cotton production fall off in the last year, primarily through weather and disease problems.
According to Cotton Inc., Pakistan's 1993-94 harvest was 6 million bales, down from 7.1 million in 1992-93. This year's estimate is 7.3 million. India had a 1993-94 harvest of 9.4 million bales, down from 10.9 million the previous year. India's crop this year is estimated at 10.6 million.
Nevertheless, China is the bellwether. "China is the key to so many things economically, and certainly for the cotton picture both in the U.S. and around the world," said J. Nicholas Hahn, president and chief executive officer of Cotton Inc. "The question remains whether China is going to be a major buyer or seller."
Reflecting China's importance, Hahn noted, Cotton Inc. is planning to establish an office there, although exactly when has not been specified.
"We see China as critically important to the fiber, fabric, apparel and retailing industries all over the world," Hahn said.

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