What Would a Change in Chinese Cotton Policy Mean?
What’s more, cheaper prices would make cotton more attractive than synthetic competition to foreign mills. In the years that Chinese policy had artificially propped up cotton prices, the natural fiber has been losing market share to cheaper synthetic products like polyester. Nicosia estimates that cotton has lost some 7 million bales annually to synthetic fibers.
“The good news is that since 2011, (cotton’s market share in blends) actually is finally rising again,” Nicosia said. “And it’s rising higher than the trend line. But we’re way below the level of where we should be, and it’s going to take several years to recover.”
Ultimately, Nicosia said, demand is what cotton will need to draw back its monumental world cotton stocks.
“Today, with the 85 cents price that has existed in the world – that price level supports production in the world of about 115 to 120 million bales,” Nicosia said. “But we’re only using 110 million bales. So if everything stays the same, it’s still going to be two years before we can ever close the gap between our production and consumption surplus that currently exists.”
Current USDA projections for 2014/15 back up Nicosia’s assessment. Global production in the coming year is expected to top 117 million bales, while consumption is expected to hit 113-million bales, according to USDA. That four million bale surplus could once again carry global stocks over 100 million bales next year.
Fighting for Domestic Acreage
Although the international outlook is shaky, cotton remains an attractive option for farmers in the United States. Compared to traditional competitive crops like corn, peanuts and soybeans, Nicosia said cotton is competitive in the Mid-South while remaining the most attractive option in the Southeast and in Texas.
As more U.S. growers opt to plant cotton in 2014, Nicosia is urging them to pay close attention to the factors shaping the cotton market. Specifically, growers should note the current gulf between old crop and new crop prices.
“At new crop, we think prices are pretty attractive near 80 cents,” Nicosia said. “We find it will be a hard time to sustain prices in new crop over 80 cents with two caveats. One is that if the China policy remains to hold all those stocks, then the world will remain to feel tight. Two, is obviously weather.
“The one thing I would encourage you on is to be careful of the inverse,” Nicosia said. “July/December is 10 cents today, and what inverses are telling you is that cotton is worth less in the future. So be careful that you don’t hold any inventory that you have this year through that inverse, because if so, that’s a surefire loss.”
Current consumption and production trends could put U.S. carryover stocks somewhere between 1.5 and 3.7 million bales in 2014/15, according to Nicosia. The difference in those two numbers “is about 25 cents difference in price.”
Reminding growers of the importance China plays in global cotton, Nicosia points at Chinese demand for U.S. cotton as the most important factor in new crop cotton prices – by a wide margin.