The cotton industry got some assurance this morning the "thin ice" of cotton prices may be thick enough to hold some weight through the rest of the 09/10 marketing year.
Both Gary Adams, vice president of the National Cotton Council in charge of economic and policy analysis, and Wally Darneille, president and CEO of Plains Cotton Cooperative, say despite the turmoil of the global economy, cotton prices stand a good chance of remaining at current levels because of increasing mill use, lower predicted carryovers and signs of recovery in U.S. and world economies.
Wally Darnielle, president and CEO of Plains Cotton Cooperative Association holds up a $50 trillion Zimbabwe currency note, as a warning of potential inflation problems in the U.S. economy.
The pair spoke at the general session of the 2010 Beltwide Cotton Conferences in the New Orleans Sheraton, where thousands of agribusiness, merchants, educators, processors and cotton growers are gathered through Thursday.
NCC Vice President Gary Adams says he sees potential for a stable cotton market through the rest of the marketing year.
Adams points out global production is down 4.8 million bales due to weather, decreased cotton acreage and quality problems, while mill use is up 3.4 million bales. This tends to strengthen or at least hold prices, he notes, adding a recovering economy worldwide could add demand as the year continues. Historically, mill use correlates very closely with overall economic health -- both globally and in the U.S. market. He also notes 75% of U.S. cotton is traded globally.
Darnielle agreed, explaining that China and India, both with growing middle class economies, were not as indebted as U.S. consumers and those in Western Europe, so demand for cotton-based apparel should remain strong as economies recover from the 2008 global recession. The only problems he sees in the "recovery scenario" is continued low consumer confidence and an overall bleak unemployment situation in Europe and North America.
Another facet of the cotton outlook that is a two-edged sword for the U.S. is the prospect of inflation, Darnielle noted, holding up a $50 trillion Zimbabwe currency note. "This is where we could be headed in this country given our current federal spending habits," he said. Still, as inflation rises fund managers tend to look for solid commodities in which to invest and cotton is relatively cheap compared to other commodities available for hedges against inflation.
Commodity prices are all in a strong upward trend, and Darnielle reminded the Beltwide group of the trader's adage: "The trend is your friend."
"Managers running from inflation tend to buy and hold commodities, and that could be good for the overall short-term health of the cotton market," Darnielle explained.
Overall, both speakers think the fundamentals of the cotton market has changed over the past two years. They cited the following reasons:
1. The U.S. crop is down and continues to spark quality concerns.
2. The cotton crop in China, India and Pakistan is also suffering.
3. China is signaling it will be back in the cotton market as an importer again soon.
4. The global recession seems to be ending, although recovery is admittedly fragile and not guaranteed.
5. Demographics in emerging economies point toward more consumption of natural fiber.
Other positives for the rest of the 09/10 marketing year include assumptions that interest rates and energy costs will remain stable, a growing world population will naturally cause increased demand for an overall upward trend in cotton and other commodity prices, and, despite an expected increase in cotton acreage in 2010, demand will remain strong enough to take the fiber produced on those acres.
"Remember," Darnielle told his audience, "We have to add 10 million more acres just to get back to where we were in 2007!"