The Beltwide is always the highlight of my annual speaking and it is exciting to make this presentation. This will be my last Beltwide speech because I am stepping down, in June 2005, from being Dunavant’s active chief executive officer, but I will remain chairman of the board forever. I have been speaking at the Beltwide for 19 years, and it has been truly an honor.
I will continue to be active but not on a moment to moment basis. As most of you know I have supported the entire cotton industry during my career but I must reflect my extreme disappointment in the working of our existing farm bill.
It seems the chances of maintaining a good step two program, is in jeopardy, and it is very necessary for our domestic textile industry, and for making U.S. cotton competitive, in the world market. I am also disappointed that a cotton producer potentially makes more money when prices are low than when prices are high. There is nothing about that situation that makes any economic sense to me. I do not blame the West Africans, the Brazilians, and Australians, for raising hell about our farm program.
I sincerely want the American cotton producer to survive, and survive well, but not based on the farm program that we have today.
I am certainly happy this is not last season because everything I believed was incorrect, and did not come true. It was the first loss our company had suffered in nearly seventy years. In looking back the primary reason was China not meeting my expectations, and this past spring they had a severe credit crunch, and we suffered many defaults from Chinese textile mills. The world wide cotton industry also suffered many defaults but that did not help our company. We are still working trying to get some of the problems resolved.
This year we are back on track and will have a good year even though cotton prices are cheap. The demand is very good and the U. S. and world will produce record crops.
When I spoke last year I talked about the sad demise of the U. S. textile industry. Last season we consumed 6,489,000 bales and conditions seemed to have stabilized, and this season’s consumption will be approximately 6,250,000 bales. Many people are talking about U. S. cotton consumption dropping below 5 million bales, and I do not see that as a reality in the next three years.
However, I do not see U.S. cotton consumption going back to 7.5 million bales in the future. The American cotton producer will be looking to the export markets of the world particularly China for his future.
I am very worried about the level of the U.S. carryover at the end of this season. I think it can threaten, and will threaten, the farm program. We at Dunavant are projecting a U.S. carryover of 7.9 million bales. If the government takes over 3 to 4 million bales and catalogs it to sell in competition with the next seasons crop then the whole program is in serious trouble. I think the taxpayers now are not going to put up with this in the future and I do not blame them.
China as I have said for years is the future as their cotton consumption continues to grow. I will discuss in more details when I talk about China’s supply and demand.
Now let me slightly change pace and talk about the U.S. and world supply-demand as we at Dunavant view it today.
Believe it or not the final U.S. crop will be about 22.8 million bales a record for us. The U.S. and world turned to cotton this season. Domestic consumption will be 6,250,000 bales, as I have already stated, and our exports will be 12.2 million bales for total offtake of 18,450,000 bales.
We have currently registered for export 8.75 million bales so China really needs to be a player this year and I think they will be.
Looking at my numbers, the U.S. carryover goes from last seasons 3.5 million bales to a whopping 7.9 million bales too much.
Every region in the U.S. produced a huge crop. Texas is going to produce 7.45 million bales, and if they had not had a seige of bad weather in the fall the final U.S. crop would have been over 23 million bales.
For next season we think U.S. production will be 19.5 million bales, and domestic consumption of 6 million bales, and exports will grow to 14 million bales, and our carryover will drop slightly to 7.44 million bales still too much.
I think weather, improved technology, and improved seed varieties created our monster crop this season. It could happen again because Texas has a huge amount of subsoil moisture to draw from next season.
Now let’s talk about the world because it is also unbelievable. World production will reach 115.5 million bales, and world consumption will be 104.0 million bales a new record. USDA says world consumption 103.3 million bales, and world production 114.0 million bales.
Our numbers say the world carryover will rise from 35.5 million bales to 46.9 million bales or about an 11.3 million bale increase in one year.
It is truly hard for me to believe how dramatically the U.S. and world number have changed in 12 months.
For 2005-2006 we see world production shrinking to 103.4 million bales, and world consumption rising to 106 million bales, and the world carryover dropping to 44.2 million bales still a big number.
Now, let me be more specific with where these numbers have come from. We think China’s production will be 29 million bales this season, and their consumption will be at least 36.5 million bales, leaving them a carryover of 8.4 million bales at the end of this marketing year. We think they will import at least 8.2 million bales. Currently, we think they have bought for import only 1.7 to 2 million bales this season. So China still has a lot of cotton to buy after the Chinese new year. Hopefully the U.S. will be a major exporter to China during this time period.
Last season China produced 22.3 million bales, and consumed 32 million bales. They have increased production by nearly 7 million bales, and consumption by 4.5 million bales in one marketing year.
India and Pakistan are both producing huge crops. India will produce at least 15.1 million bales versus 13.8 million bales last season, Pakistan will produce 11.5 million bales versus 7.8 million bales last season.
Basically, every cotton producing country, in the world, is enjoying substantial increases.
Turkey is always, a big customer for U.S. cotton. The country consumed 6.1 million bales last season, and we project 6.25 million bales this season.
The U.S. sold Turkey 1,460,000 bales last season, and they have already purchased 1,150,000 bales for this season, and they will reach at least the same level this season.
Mexico is another big market for the U.S. Last year they consumed 2 million bales, and they will be down slightly to about 1.95 million bales. The vast majority of Mexico’s cotton will come from the U.S.
China, Mexico, and Turkey are still our 3 largest markets and will continue to be for the future.
I mentioned last year the emergence of Brazil as a major cotton producer because of the huge increase in cotton acreage in Mato Grosso and Bahia. They produced 5,850,000 bales this season, and I project even with prices down they will produce 5,250,000 bales in 2005-2006.
Uzbekistan has increased it’s production to 5 million bales versus 4.1 million last season.
As you scan the world this season we have major increases in the world in production and consumption, but the production has grown much faster, and world production will definitely decline next season primarily because of price.
The West African countries have really struggled because prices are way below their cost of production, and we have a very weak dollar, and with the strength of the euro they are further penalized.
Now, I will attempt to discuss my views on price. I only hope what I say today has more validity than what I said a year ago. I never dreamed a year ago that December cotton would trade at 84.80 in the fall, and then in the months following cotton prices would drop dramatically with a tight statistical situation. Our U.S. carryover dropped to 3.5 million bales, and prices went down for October cotton to 43.50 cents per pound. Today, March cotton is trading at 45.30 in the face of huge U.S. and world supplies.
Today two factors that have held cotton prices at today’s level has been the weakness of the U.S. dollar, and the strength of the Euro. World price of competing growths has not plunged as many of us thought they would.
Maybe world price will drop in relationship to New York futures, but it has not happened yet to a major degree. It can happen but only time will tell.
China can help to stabilize prices in the future if they start an aggressive buying campaign. Our people in Asia do not think they will be aggressive until after the Chinese new year, which comes after February 9, 2005.
The reason December futures were strong and that December went over march by 500 points, in my opinion, certificated stocks were cheaper than buying equities, and redeeming cotton.
If the relationship of world price, to futures does not change then March can go over may. Time will tell if world price is going to decline or cotton futures increase. I am certainly not predicting March futures to go over may, but the potential does exist with certificated stock being 61,400.
If you buy producer equities today at four cents, and redeem the cotton then, in my opinion, you are buying a loss with the relationship between world price and New York futures. I certainly hope the relationship will change in the weeks ahead.
Today, I see no reason for prices to go substantially higher because you run into a wave of selling by merchants and cooperatives. Certainly, we can get a rally of 2 to 3 cents if the commodity funds who are short decide to cover their position, but a major rally, in my opinion, is not in the cards with world production at this season’s record level.
If the world price declines sharply in the future then of course New York futures can also decline and will decline.
As I have said, first we must see weakness in world price to a major degree, and it has not happened yet.
With the U.S. carryover at 7.9 million bales if I was a producer then I would sell at any equity because somebody is going to be left holding the bag come summertime. The loan, as you know, is a 10 month loan, and cotton loans will start expiring in late july, and then escalate each month going forward. We need for China to purchase much more in the world than my projected 8.2 million bales of imports. It can happen if the Chinese government decides to build Chinese stocks in the future, but I am certainly not predicting that to happen.
There is certainly more potential for world prices to decline than escalate with a world carryover growing by more 11.3 million bales.
We see China, reducing production next season by 2.25 million bales from 29 million bales to 26.75 million bales, and we see Chinese consumption continuing to escalate going from 36.5 million bales to potentially 38 million bales.
I just mentioned Chinese consumption growing next season to potentially 38 million bales, and because of less production in China their imports will increase from 8.2 million bales this season to 10,750,000 bales next season. That is certainly a bright spot for demand for the future.
When I spoke last year I said that we would have a substantial increase in world production this year from 93.1 million bales to 102.3 million, and we will end up producing 115.5 million bales in the world. Nobody, and I mean nobody, would have predicted that kind of production. World consumption has gone up also from 98.4 million bales to 104.0 million bales a nice increase, but nothing can compare to the production number.
I have stated that I am not a supporter of our current farm program as it is today, but I am only a small voice in the crowd. I do know that you as a producer and ginner must support the National Cotton Council if you are going to have a chance for the future. I certainly support it though I don’t agree with current farm policy. The Council has been good to me, and our company, for many years, and has on the whole, created a lot of good for the U.S. Cotton industry.
Thank you for my opportunity of serving you for the last 19 years!
