Early in each season the primary focus of the market is on supply. Sure, demand plays a role but, that role is a time delayed phenomena when compared to supply; i.e., demand must prove itself throughout the season whereas supply becomes a fixed quantity rather quickly. Even at the end of each season supply is still important as a relative measure of the supply/demand situation; hence, the interest in the widely touted stocks/use ratio. That said, it should be no surprise then that this presentation shall focus first on the fundamental supply side of the equation. One of the first, and in our opinion, the most important item that requires notice is the widening gap between world supply and demand.

The gap in 1990/91 grew for the first time since the 1985 crop year. It is expected to grow further in this crop year. Obviously, the fluctuation of this gap has a direct impact on prices. Exhibit 1 shows the year-over-year change in this gap beginning in 1983 for the world and U.S. versus the resulting change in the average "A" Index. In 1983, the world gap fell by .5 million bales and the U.S. gap fell by 3.3 million resulting in a rise of the average yearly "Al' index of 1,100 points to almost 88 cents per pound. U.S. futures prices averaged between 78 and 79 cents that year. Because world prices were so strong, the incentive for production to increase the following year was quite compelling -- and increase it did, rising almost 3 million bales to a world record of almost 89 million bales. Thus, a 1.1 million-bale increase in the gap resulted with China accounting for about 65% of the increase. Because of the low U.S. ending stocks in 1983, our contribution to the gap was small despite a production increase of 5 million bales. The average "A" Index fell by 1, 850 points in 1984 to under 70 cents per pound and by a further 1, 985 points in 1985 as the gap again widened by an additional 3. 4 million bales. World prices fell not only because the gap increased but also in anticipation of competitive pressures of the U.S. market oriented farm program taking effect in August of 1986. Over the next four seasons, the excess stock level fell by 22.2 million bales, thanks to constricted production and increased world consumption. Average "A" Index prices rose from 49 cents in 1985 to almost 83 cents in 1990. In 1991, the gap is expected to rise another 4 million bales following the .7 million-bale increase in 1990. World prices have already reacted to this by falling by over 1,300 points from August 1 to the end of December. The crop year average "A" index has fallen by over 1,500 points between last season and this season.