Joe Nicosia: The Outlook for U.S. Cotton
March 11, 2009 “How did we get where we are at today?” Joe Nicosia, CEO of Allenberg Cotton Company, began at the Mid-South Farm and Gin Show’s Ag Update Meeting.
He reviewed the events of 2008, from the build-up in cotton speculative positions accompanying the price rise prior to March 4 to the tumbling of commodity prices and the dive of the global economy. It was certainly a tale of sadness and mistakes in the beginning. “Speculative positions blew out of cotton as the market fell after March 4,” Nicosia says, explaining the dimming prospects for cotton as the economy stalls.
But the message of Nicosia’s presentation was equal parts optimist and cautionary. Learn from your mistakes, he says. If we are to overcome the effects of the recession and another surplus, the U.S. cotton industry must examine its repeated errors and be smarter going forward. “We must deal with another surplus. We are talking about a larger than expected carryout; we began the 2008/09 season with the biggest US cotton surplus in 40 years. We have the same increase in carryover this year,” he says.
U.S. cotton is also guilty of continuing to underestimate the Chinese crop and therefore overestimate their demand, he continues. “The USDA China import estimate has been way off for the past three seasons.” Now the recession comes and we have a “monumental collapse in demand.” China’s cotton use has also experienced a serious collapse. One of the principal factors driving the cotton market since 2000 has been the growth in China’s mill use. “The principal fundamental factor now driving commodity prices today is the global economic recession,” he says. The seizing up of financial markets in October was accompanied by a sharp deterioration in the U.S. labor market. The impact on cotton consumption has become “pronounced” in recent months. He believes job losses and unemployment are two critical things affecting the psyche of the consumer.
He notes that the USDA estimate of world cotton use has already declined from 129.5 million bales to 112.6 million bales at present. “The drop in the demand forecast so far is bigger than the size of this year’s U.S. estimated cotton crop,” he warns. In the five recessions of the last 35 years, world cotton demand has never fallen by more than 6 percent during these periods. So what’s the critical difference now? “40 percent of cotton used to be consumed by ‘planned economies’ that were not heavily affected by recessions. Now those countries have become more integral to the global economy and are greatly impacted by the recession, too,” Nicosia says.
He acknowledges the enormous uncertainty of the industry with a global recession underway curtailing cotton use in every major market. “But offsetting that, we have an empty pipeline that will need to be refilled. We have China and India holding over 25 million bales at an average of 25 cents over the market price. While India is out of the market, we (the U.S.) are taking our business and India’s business,” Nicosia says.
Check the April issue of Cotton Grower for more on Joe Nicosia’s commentary from the Mid-South Gin Show.
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