By Dr. O. A. Cleveland

For Bayer CropScience

After easing lower early last week, cotton futures moved higher in response to last Thursday’s release of USDA’s June supply and demand report. The report was somewhat mixed, but did note the rapidly declining conditions brought on by the spreading U.S. drought. December pressed to near 135 cents that day before closing at 132.99. Too, on the heels of being down 13 cents in two days, the old-crop July contract moved back above 150, settling at 151.05, that was up the daily 600-point limit. Market momentum continues to favor higher prices, though Mother Nature still holds her trump card.

USDA’s report was somewhat in line with expectations as 2010/11 marketing year exports were lowered 500,000 bales, down to 15.0 million. Consumption was unchanged; thus U.S. ending stocks were increased 500,000 bales to 2.25 million. The 2011/12 crop was lowered 1 million bales, down to 17 million. Yet, USDA also decreased 2011/12 exports from 13.5 million bales to 13 million. Thus, the net result was to hold ending stocks for 2011/12 even with its May estimate of 2.5 million. (Remember the 500,000 bale decrease in 2010/11 exports increased 2011/12 beginning stocks by 500,000. Couple that with the 500,000 bale decline for 2011/12 exports, and the 1 million bale decline in 2011 production, then the net result was a wash with respect to ending stocks.)

The surprise was that USDA reduced the U.S. crop by only 1 million bales. Many were expecting as much as a 2 million bale drop. Some estimates even have U.S. production as low as 15 million bales. The bulk of the Alabama and Georgia crops are also still extremely starved for water, too say nothing of Texas. Without moisture in Texas in the next two weeks, the 2011 U.S. crop could be as low as 14.5 million bales.

World stocks were raised by 320,000 bales. China was dealt with much the same analysis as that for the U.S. China’s imports for 2010/2011 were lowered 1 million bales, which were reflected by 500,000 bale decreases in consumption and ending stocks, respectively. The 2011/2012 beginning stocks were lowered by 500,000 bales and Chinese consumption was lowered by 500,000 bales. The net effect was to leave China’s 2011/2012 ending stocks unchanged.

Reports from China suggest last week’s rains in the Yangtze Valley have alleviated concerns of drought. However, some mention is being made of slow growth due to cold temperatures in the all important Xinjiang Province.

The key relative to China will be its level of consumption. There are increasing reports of an impending burst in the Chinese housing bubble. Real estate prices facing the ever increasing middle class are now some of the highest, if not the highest, in the world. Expressed in years required to pay the typical mortgage, young couples are looking at as much as 57 years. There can be little doubt that real estate prices must drop, or the consumption of consumer good will face a dramatic downturn.

Short to intermediate prices are higher, but Chinese consumption will become increasingly important.