U.S. stocks have been whittled down over the past three years. Concerns over the China stocks and Pakistan's 2010 crop also contribute to optimism.

The pace of the economic recovery, India's decision on exports, China's actions on rebuilding reserves and the relation of cotton price and profit potential of competing crops all weigh on markets going into fall and winter and on 2011 planting decisions.

But so far, so good, says Gary Adams, vice-president for economic and policy analysis for the National Cotton Council.

"The situation now is far different from recent years," Adams said at the American Cotton Producers/Cotton Foundation joint meeting in Lubbock, Texas. "Optimism has steadily increased since late 2009," Adams said.

He said October futures were trading in the 87 cents per pound range. "The Far East index has been in line as well." He said December 2010 futures made runs at 80 cents several times during the year but would back off into the 70s. Until recently. "The last few weeks December has been in the 83 cents range."

Stocks, he said, have been "tighter than anticipated. China stocks are also tight."

He said China cotton stocks may be lower than USDA estimates.

U.S. stocks have been whittled down over the past three years. Concerns over the China stocks and Pakistan's 2010 crop also contribute to optimism.

Adams said a 10 million-bale U.S. cotton stock level in 2007 has been trimmed to 3 million coming out of 2009. "We are in a much different position in 2010. Warehouses may not be completely empty but those 3 million bales are spoken for."

He said 480,000 bales remain in the marketing loan and about 19,000 are certificated, down from 1 million bales, and "one of the lowest levels on record. But we could see some erratic behavior by October."

He said the low stocks cannot be made up soon. "It will take three to three-and-a-half months for the Northern Hemisphere 2010 crop to move into the market," he said. "So we have a tight market going into 2010 harvest."

And there may not be enough production to fill the gap. Recent flooding in Pakistan could reduce the world's fourth largest cotton producer's crop by as much as 30 percent. "Pakistan is a net importer of cotton so there is the potential for Pakistan to import more cotton."

He said India will see a substantial increase in production, but their export activity is a question. Currently, India has an export ban, which followed an export tax. "We have questions about what India will do. If they are in the market they will be competitive," Adams said. India typically undercuts U.S. cotton prices.

"But how aggressive with they be? The USDA assumption is they will resume exports Oct. 1 without an export tax."

That assumption would put India exports at 6 million to 6.5 million bales, similar to 2009. But Adams says 4 million to 5 million may be a more likely export cap.

He said China has depleted its cotton reserves by some 15 million bales in the last 14 to 15 months. "A big question is how much they have left in reserves. We don't think it can be much. So when do they start rebuilding reserves? Now, they have no flexibility."

Read more: Farms.com

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