Balancing economic forces at home and abroad could reduce the ongoing tug-of-war faced by the U.S. cotton market and offer pricing opportunities for growers, according to farm economist Gary Adams.

Adams, the National Cotton CouncilΆs vice-president of economics and policy analysis, says among the issues facing the U.S. cotton market include the ongoing competition on the demand side from cottonΆs rival polyester, and on the supply side from strong prices for grain and oilseeds.

These prices tracked together during the first half of the 2000 decade. Then corn prices skyrocketed in the latter half of the decade as corn ethanol production expanded. Cotton prices ultimately competed with corn in 2011 at record-setting prices which made U.S. cotton uncompetitive on the demand side.

“Today, I think the U.S. cotton market is searching for balance,” Adams told the packed crowd at the 2012 joint meeting of the Arizona Cotton Growers Association and the Arizona Cotton Ginners Association in Carefree, Ariz.

Adams says more downside pressure currently exists for the U.S. cotton market than upside pressure.

“I think the upside potential is limited based on current world cotton stocks,” Adams said. “The downside finds some support since polyester prices are holding in the mid 70-cents-per-pound range. Recent dips in cotton prices have generated some interest in cotton demand.”

According to the latest USDA estimates, world cotton stocks achieved the 67 million bale mark during the 2011-2012 marketing year; up from about 50 million bales in the 2010-2011 marketing year.

Also on the U.S. cotton marketΆs radar screen are new policies implemented by the governments of China and India — countries which typically rank first or second in mill use and trade.

Historically, China is the worldΆs largest cotton producer. From 2006 to 2008, Chinese cotton production averaged about 36 million bales each year. India claimed the second spot during the same time period with 23.1 million bales. The U.S. was third with 17.9 million bales.

Beginning with its 2011 crop, China gained the attention of the world cotton industry when it implemented an explicit support program. The move was designed to rebuild government-held cotton stocks by purchasing fiber cotton from the world market at about $1.40 per pound range based on current exchange rates.

The price has been 20 cents to 50 cents or more above world cotton prices; a financially lucrative decision for ChinaΆs cotton producers.

“Over the short term, ChinaΆs action is one reason why U.S. cotton prices held firm during that time period,” Adams explained. “However there are many concerns about the negative impact on the market when China decides to release cotton from the reserves.”

China purchased about 14 million bales for its reserves from October 2011 to March 2012; about one-third of ChinaΆs annual mill use. ChinaΆs price support program is likely to continue for the 2012 crop.

India, the worldΆs second-largest cotton exporter after the U.S., has an erratic reputation for the implementation of new government cotton programs and then retracts the programs shortly thereafter, Adams says. In recent years, the Indian government imposed export restrictions in response to a tighter domestic cotton market.

Earlier this spring, India halted most cotton exports, but was expected to honor previous export commitments. Subsequently, India relaxed the export limits and is now back selling in the world market. Additional limited export shipments will likely continue into the fall months or beyond.

Adams said, “It is a bit unsettling to realize that the direction of the U.S. cotton market hinges on government decisions in China and India.”

Striking a balance

The U.S. cotton industry will closely monitor how China implements its 2012 cotton purchase program and how much cotton India actually exports over the next six to 12 months.

“For the U.S. cotton industry, itΆs all about striking a balance overall,” Adams said. “We need to find a balance with polyester prices on the downside, grain prices on the upside, and other issues.”

Weather is always one of the major issues that can make or break the U.S. cotton market through reduced yields. The eyes of the world are sharply focused on the U.S. Cotton Belt; especially in Texas, Oklahoma, and the Southeast region impacted by reduced rainfall in recent years.

“The U.S. cotton market will pay attention to how the weather pans out in these areas. This, along with the cotton policies held by China and India, will be major factors that can swing the U.S. cotton market,” said Adams.

The drought appears to have lessened its disastrous grip on Texas this spring due to increased rains, but pockets of dry weather still exist in the High Plains where most Texas cotton is grown. If timely rains continue across the U.S. Cotton Belt, higher yields could result. Yields would still tend to be lower compared to average, but better than last yearΆs drought-infused yield losses.

The potential exists this year for a 17-million-bale U.S. cotton crop, Adams says, higher than last yearΆs 15.6 million bales.

“It all boils down to timely rains,” Adams said.

Worldwide, Adams expects cotton production will fall this year to 115 million to 116 million bales; down from 123 million bales last year.

China will likely reduce cotton plantings by about 10 percent due to strong competition from food crops. Fiber acreage in Turkey could sink 20 percent while India could see a 10 percent acreage decline. Global cotton acreage, minus the U.S. acreage, could fall 6 million acres.

Another ongoing issue which impacts the U.S. cotton market is global mill use. Adams says worldwide mill use could increase 3 percent to 4 percent during the 2012-2013 marketing year; an encouraging sign for the U.S. cotton market. However, the growth will depend on continued improvements in the global economy and competitive prices between cotton and polyester.

“The key is to look at the bottom line for ending stocks. Barring some weather problems, the world crop harvested this fall is expected to exceed demand. As a result, the potential still exists to build stocks further by the end of the 2012 marketing year,” Adams said.

Looking ahead to cotton prices, Adams remains cautious.

“In the near term, I think cotton will start to pick up stability from current polyester prices,” the economist said. “This fall, weΆll see which pressures still exist. Key factors will include worldwide cotton yields, ChinaΆs cotton stock management, IndiaΆs export policy, and whether cotton can regain market share from polyester.”

After the fall harvest, the attention of the global cotton market will be focused on the demand side of the equation. U.S. producers hope prices move higher for domestic-grown cotton.