Raw cotton prices recently set a record at over $1.25 per pound on the ICE futures market in New York City as available supplies are tight enough that markets respond to any conditions, like hail in Texas and cold weather in China, which may affect supplies over the next year. Cotton crops in the northern hemisphere are being harvested now while southern hemisphere crops are being planted.

 

Cotton does not have a production problem this year. The Foreign Agricultural Service (FAS) of USDA projects world production for the 2010/11 marketing year that began August 1 a 116.7 milions de bales (480 pounds per bale) des 101.4 million bales last year and 107.2 milions de bales a 2008/09. It will be fourth largest crop ever, exceeded by 121.7 milions de bales a 2006/07, 121.6 milions de bales a 2004/05 i 119.7 milions de bales a 2007/08. The two previous short crops did pull world carryover stocks down on July 31 per 46.7 milions de bales, the smallest since 1997/98. Carryover supplies for the five previously years were all over 60.0 milions de bales, the five largest carryovers ever.

World consumption is estimated at 120.8 million bales for 2010/11, up from 117.7million bales last year and 109.9 milions de bales a 2008/09, and the third largest yearly total exceeded by 123.8 milions de bales a 2006/07 i 123.3 milions de bales a 2007/08. With consumption exceeding production, carryover supplies will be pulled down further to 44.7 milions de bales. Prices usually rise when consumption is strong and carryover supplies decline to historically low levels, but breaking price records usually requires additional circumstances. Part of that lies with the anticipated end-of-year stocks on July 31, 2011.

Els EUA. is often viewed as the residual supplier of cotton to world markets. While the U.S. is the third largest producer in the world at 18.9 milions de bales a 2010/11, after China at 31.5 million bales and India at 26.0 milions de bales, U.S. consumption is expected to be only 3.6 milions de bales, the seventh largest compared to China at 50.0 million bales and India at 20.7 milions de bales. Els EUA. has a relatively open market for cotton products and imports most of its finished items. Because of the low domestic use, Els EUA. is by far the world’s largest exporter at 15.5 million bales this year followed by India at 4.8 million bales and Uzbekistan at 3.8 milions de bales. U.S. carryover stocks will be only 2.7 milions de bales, considered by the trade to be the minimum carryover needed to supply markets. At the end of the 2007/08 campanya, U.S. stocks were over 10.0 milions de bales.

China normally holds the largest carryover stocks, Sobre 20.0 million bales when ending stocks were 60.0 milions de bales. Their stocks next July 31 es projecten en 14.7 milions de bales, 32.9 percent of the expected world carryover supplies. India’s carryover stocks are projected at 7.7 milions de bales, up from an average of 7.1 million bales for the last four years. This increase in cotton carryover stocks is no accident; India is limiting exports in an attempt to hold down domestic prices.

India imposed an export ban in mid-April after world cotton prices and Indian prices had increased from $0.55-0.60 per pound in March 2009 to over $0.80 per pound in March 2010 as markets began to recover from the worldwide economic slowdown and smaller crops began to impact expectations of carryover supplies. World and Indian prices continued to increase as the available supplies were furthered tightened by the Indian export controls. Even though cotton prices have increased sharply, the Indian government is guaranteeing lower prices for domestic use. Conflicting reports from the government about when exports would be allowed to increase and under what conditions have added to the uncertainties. The official limit on exports for this marketing year is 4.3 million bales and FAS is projecting exports of 4.8 milions de bales. For the last four years India has exported 4.9 milions de bales, 7.5 milions de bales, 2.4 million bales and 6.6 million bales per year, for an average of 5.4 milions de bales. India’s crop this year is a record at 26.0 milions de bales.

India is relatively new to the cotton exporting business. India has by far the world’s largest area harvested for cotton estimated at 26.9 million acres for 2010. China is a distant second at 13.0 million acres followed by the U.S. a 10.8 million acres, Uzbekistan at 3.2 million acres and Brazil at 2.6 million acres. The “cotton fourcountries of French-speaking West Africa also have a total area of 2.6 million acres. Until about ten years ago India’s yield per acre was less than half the world average and less than one-fourth of China’s. With hybrid cotton seed and biotech cotton seed to protect potential yield from insect pests, yields increased from an average of 300 pounds per acre in 1991-2000 per 519 pounds in 2010 and a high of 554 pounds per acre in 2007. India’s production doubled from 12.3 milions de bales a 2001/02 per 26.0 milions de bales a 2010/11, and exports increased from an average of 420,000 fardells de 1991/92-2000/01 per 7.5 milions de bales a 2007/08.

India’s actions and the market fallout have set off a firestorm of protests from textile organizations in major cotton consuming countries. Threats have been made about filing cases at the WTO where India has been a member since the WTO came into force on January 1, 1995. The Indian government has a history of intervening in all kinds of agricultural markets to either prop prices up to protect producers or hold prices down to benefit consumers. Officials are currently arguing about the proper course of action which adds to uncertainty. When those decisions had a minimal impact on international markets, the actions were lamented by trading partners, but no policy response was made. As a major participant in markets, now India does not have the option to continue such policies.

Over the last two years, Indian government decisions have had a major impact on the sugar and wheat markets and now the cotton market. They have argued in the WTO Doha Round of trade policy negotiations that they need all kinds of exceptions to disciplines on tariffs and other interventions in markets that hurt other countries involved in international trade. Those were not sound arguments when they were made and are even less sound today as India’s policies continue to add uncertainties and real costs to trade.