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MAKE OR BREAK: Living Under the “Volcano” of China’s Cotton Policies

MAKE OR BREAK: Living Under the “Volcano” of China’s Cotton Policies

Around the Globe

While it is a near certainty that cotton acreage will be reduced globally in 2015, some countries are more likely to draw back plantings than others.

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Growers in Brazil, for instance, see their best returns when they double-crop cotton with beans. They are not likely to draw back acreage for this reason. Australia, another of the world’s leading producers of cotton, is unlikely to produce less cotton as well. Output there is already down due to drought conditions in recent years.

“If it rains in Australia,” Nicosia says, “they’re going to plant every acre they can to cotton.”

India is another major producer of cotton, and its policy of maintaining a minimum support price will ensure that there won’t be a significant acreage reduction.

Ultimately, the largest acreage reductions will come from two countries: China and the United States. Nicosia forecasts that 64 percent of the acreage drawbacks globally in 2015 will come from these two countries.

In China, the switch from government stockpiling of domestically produced cotton (often bought at levels of near $1.20 per pound) to a target price system will make cotton production less attractive. In the remote northwest region of Xinjiang, however, cotton production remains a viable option.

“When they shifted to the target price system, what they told Xinjiang was that ‘We’re going to promise you that same prices you were getting before, but in the form of a target subsidy,’” Nicosia said. This was a sweeter deal than the one growers in the country’s eastern regions were offered.

The robust target price is used as a tool of appeasement for the traditionally troubled region of Xinjiang. Jobs are scarce in the remote area, and the cotton industry employs hundreds of thousands of inhabitants.

As a result, Chinese acreage reductions, while sizable, won’t be as drastic as they otherwise might have. According to Nicosia, estimates for cotton production in China for the coming year fall anywhere from 24 to 28 million bales. That number would represent a noteworthy drop off from previous years. Still, expect the Chinese to tighten their own cotton balance sheets not by significantly reducing domestic acreage, but by significantly limiting imports from elsewhere in the world.

On the Home Front

In America, cotton’s drop in profitability will be too much for producers to ignore. Nicosia is expecting a 15 percent decline in U.S. acreage in 2015, down to 9.4 million acres nationwide. In January, Cotton Grower magazine released results from its annual acreage survey, revealing a similar projection of 9.7 million acres in the U.S. in 2015.

Nicosia believes the perception of cotton in the U.S. is worse than the reality.

“I wouldn’t sell your cotton equipment just yet,” Nicosia said, citing the rising loan values available to U.S. producers. He also referenced factors such as equity payments and other income like cottonseed prices. He urged growers not to underestimate the value of the rising yields they have been able to achieve in the U.S. in recent years.

“In net return, you’re probably still getting over 70 cents, and you can work your way through this in some other form,” Nicosia said.

That message of resolve to American producers – hundreds of whom were in the room during the presentation – was used to underscore Nicosia’s conclusion. Market prices will remain contained until China’s reserves are diminished significantly, he said.

“Focus your attention on maximizing your equity. For the next short years in here before we can make a dent in the total world carry out and the Chinese carryout, that’s where you’re going to get your marginal return,” Nicosia said. “With that, remember that life can be peaceful under the volcano.”