Weak prices are symptomatic of an oversupply of cotton. The past five years have seen significant stock building activity, particularly in China. Weakened demand has also plagued the world cotton market following the Asian financial collapse. As a result, since 1994 world cotton stocks have grown by almost 13 million bales and reached an estimated 45.1 million bales on July 31, 1999. In August 1999, we began the crop year with expectations of world mill use running about 88 to 89 million bales. Thus, beginning stocks were equal to six months of mill use.

USDA projects MY99 world production to be 87.1 million bales, up 2.3 million from the previous year on the strength of a larger U.S. crop.

World mill use in MY99 rebounded much more strongly than anticipated. According to United States Department of Agriculture, world mill use in MY99 reached 91.3 million bales with China (+3,000,000), India (+680,000) and Pakistan (+650,000) accounting for much of the increase in off take.

In April USDA revised its supply and demand balance sheet for China back to the MY91, reflecting newly available information regarding that country's cotton consumption. The net effect was to increase MY98 Chinese ending stocks by 3.7 million bales to 21.1 million, a level consistent with the long held belief of many private analysts. These analysts have long believed that USDA's estimate understates the true magnitude of China's stock position.

Using USDA's estimates, the expected world ending stock on July 31, 2000 is 40.6 million bales for a stocks-to-use ratio of 44.5%. Stocks remain considerably higher than historical averages and the stocks-to-use ratio is consistent with prices well below average.

Among the many factors that will impact the eventual level of cotton prices, one of the most influential will be China's cotton policies. With MY99 carryover estimated to exceed 21 million bales, Chinese authorities turned to the export market in order to reduce burdensome stock levels, and exports are projected at 1.7 million bales for MY99. In addition, Chinese authorities began reform of the country's cotton policy regime, introducing a new procurement system that changes the cost of acquiring cotton and delivering that cotton to textile mills and ports. The new system is intended to generate internal Chinese prices that are more consistent with prevailing world prices.

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