Nicosia: Change in China Policy Could Impact Imports, Prices
August 20, 2013 As long as China maintains its current import policy, it’s going to remain a large importer of cotton to help maintain its massive cotton reserves and, thus, keep world cotton prices supported.
But, hints Joe Nicosia, executive vice president of Louis Dreyfus Commodities, a potential change in China’s policy – perhaps as soon as 2014/15 – could reduce that country’s need for imports and cause a drop in world prices.
“Today, we find ourselves with a three-tier marketing system,” explained Nicosia, speaking recently to the Southern Cotton Ginners Association. “We have the U.S. with a smaller crop, some built-up export demand to China, stocks that are very small and prices that should stay fairly supported. Then, we have the world with a 118-million bale crop over surplus that’s going to fight for export demand to try to get rid of stocks. And then we have the third pricing, which is the Chinese.
“It’s going to play out in about nine months’ time, until we find out what the 2014/15 China policy is.”
According to Nicosia, no one knows at this point what China will do. But there is a potential likelihood that they will switch policy away from building up their reserves, subsidize production to their farmers and allow cotton to move more directly to their textile mills. That would free up stocks, reduce import demand and lower prices.
“That’s painful at the beginning, but ultimately this is what has to happen,” said Nicosia. “Everyone in the world is better off if we can start to use more and more cotton. And the only way to eventually increase our production is to increase consumption.”
He noted that the market is already anticipating an increase in total world supply, based on the current six-cent inversion between prices in 2013/14 and 2014/15. “It’s telling you that your cotton is worth more today than it’s going to be worth in the future,” he pointed out. “You have to be very careful about marketing your cotton in an inverse.”
His advice – sell. “There’s no glory in carrying inventory through an inverse,” he said. “If you want to be bullish, go out and buy a call or a deferred future. That will be much more beneficial to you than holding your cotton.
“But, as long as this current policy continues, you may have a glimmer of hope in a short window,” he added. “When you see weather-related rallies or other things in the nearby, make sure you take that chance to market your crop.”
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