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Riding Out Cotton’s Flooded Market

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A significant reduction in Chinese acreage is an undoubtedly good thing for prices. As Nicosia pointed out, the surest pathway to cotton price recovery is for China to begin consuming more cotton than it produces each year.

Of course, a reduction in American acreage is ultimately beneficial for global carryout as well, although that is a bitter pill to swallow for U.S. producers. Nicosia stressed that perseverance is key during this difficult time in U.S. agriculture. After all, the rest of the world’s cotton producers are struggling with the same price woes.

“So, the tide changed,” Nicosia said. “There’s a quote from Warren Buffett that says only when the tide goes out do you see who’s been swimming naked.”

Digging In for 2016

For U.S. cotton producers, 2016 is going to be a challenging year. Nicosia offered some advice on how to navigate these troubled waters.

“We think, the number one thing, is conserve your capital,” Nicosia said. Then, for pricing: “58 cents for December cotton is cheap – it’s cheap for a reason though. It’s cheap because it doesn’t want you to plant too much cotton. It wants to give China room to breathe, to liquidate this crop.

“Today, if cotton prices go from 58 to 65 cents, your cotton is not going to be worth any more. The way the U.S. government program is structured, especially with the adjusted world price, cotton below the loan, in equity form – you’re not going to receive any more for your cotton until the prices go above 70 some-odd cents. So what you see is what you’re going to get. Now that doesn’t mean you can’t profit from a rising price of cotton. The question is do you do it by growing it or do it by owning it?”

Urging the producers in the room to consider buying December calls, Nicosia noted that if the U.S. has a small crop in 2016, 58 cents will ultimately be undervalued.

While those numbers may not provide much comfort for U.S. producers, there are positive developments on the global market for U.S. cotton. Nicosia cited American cotton’s sustainability and traceability as a major factor in creating demand for the U.S. crop.

What’s more – the glut of global stocks will only get smaller from here, making conditions favorable for a price recovery in the coming years. If there was a note of optimism in Nicosia’s message, it was that the fundamentals for global cotton prices have likely found their floor. As he pointed out, the current marketing year should make a noteworthy dent in global supply.

“The world carryout should drop by another 7 to 8 million bales this next year going forward, unless we have absolutely wonderful weather and huge yields everywhere,” he said. “That’s good news.”

For now, U.S. producers can only hunker down for the year ahead.

“Be patient. Be cautious. In the short term, stay alert and conserve your capital,” Nicosia said in closing. “2016 may not be the greatest year for it, but it’s going to get better after that, especially in the long term. The future looks bright for us as these stocks and structural deficits in China improve.”

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