ABSTRACT

Intensive foreign textile competition has cut U.S. mill use of cotton fiber almost in half since 1996 to near 6.2 million bales this season. As a result, the market environment for U.S. cotton has been restructured, subject to the complex and erratic forces of export demand. Consequently, price risk for industry participants -- producers, merchants, cooperatives, and textile mill buyers -- has been increased substantially.

The foreign supply, demand and policy environment adds up to an explosive combination, impacting the marketplace. In addition, the dynamic forces of economic and weather-related conditions are stirring up the supply-demand relationships, causing unexpected price movements.

Because China accounts for about one-third of the world's manufactured cotton textiles, Chinese officials play a dominate role in the cotton market. Their policy decisions affecting Chinese cotton production and cotton imports greatly influence the world price of cotton.

Producers worldwide are planning to plant more acreage to cotton this year than last season. Provided yields are average or better, production is expected to exceed consumption by several million bales. Carryover stocks will likely increase and price decrease.

Buyers and sellers of cotton will be evaluating new and low risk strategies of pricing cotton. Their strategies will likely include more use of buying and selling options along with selected futures hedges.