The Dickensian State Of Cotton
February 9, 2009 Allenberg Cotton Co. CEO Joe Nicosia began by quoting Charles Dickens: “It was the best of times, it was the worst of times.”
In 2007, Nicosia replaced the venerable Billy Dunavant as the presenter of the “U.S. and World Cotton Outlook” for the Ag Update Seminar at the Mid-South Farm and Gin Show in Memphis. That performance earned Nicosia a 2008 encore on February 29.
“We have two very divergent themes going on in the cotton market,” Nicosia said.
The Worst of Times …
… The Nearby Months
“In the nearby months, we are faced with the job of selling an immense 8.7 million-bale surplus – the second highest in 20 years,” Nicosia said. “The price of cotton must be low enough to attract demand.”
Ending stocks were built by lower exports to China and a larger-than-expected U.S. crop. “The projection for the U.S. crop was about 18 million bales,” Nicosia said. “It ended up being over 19 million bales.
“At the same time, our export demand slackened. Originally, export demand was estimated at about 171⁄2 million bales. Now USDA says to expect about 15.7 million bales. However, (Allenberg’s) estimates are 15 million and headed south. It will be smaller than 15 million.”
The 8.7-million-bale carryover is 44% of total use, and Nicosia added, “That carryover will be half the size of our crop next year. Again, that’s a very large number and disposing of it is going to be very difficult.”
The U.S. continues to face competition and a declining market share in China. “China is very critical and very important to the demand base for U.S. cotton,” he continued. “ … Every year China is supposed to run out of cotton, and yet every year at the end, they seem to be fine.”
As an example, USDA began 2006 by saying China would have a 28-million-bale crop. That was revised later on to 35.5 million. “That’s an extra 71⁄2 millions bales thrown into the market,” Nicosia said.
Additionally, supplies from India and Brazil have increased dramatically over the past five years. Yields in India have doubled, going from 250 pounds per acre to 500. Brazil has been expanding acreage while its consumption remains flat. The country’s exports have gone from roughly 500,000 bales to around 2 million bales.
“Since the beginning of this season, our market share in China has dropped from nearly 70% to 20%,” said Nicosia. “At current U.S. market prices, we will have to wait for Indian cotton to sellout before our market share can recover.”
Where are We Now?
Nicosia says agriculture’s prosperity can be summed up in one word – ethanol. “We are essentially burning food, and we are burning a lot of it,” he explained. “In December of 2007, Congress passed the Renewable Fuels Act, and the demand for corn is going to continue to be boosted. Prices of all crops have risen because of this. The struggle for acreage has begun.”
While corn acreage rose by 15.3 million acres in 2007, soybeans acreage dropped 11.9 million. As a result, soybean prices have reached record levels. At the time this was written, November soybeans on the Chicago Board of Trade were steadily climbing toward $14 per bushel. Also as a result, cotton prices have risen to defend acreage. Again at this time, the life-of-contract high for the December contact on the New York Cotton Exchange had exceeded 98 cents per pound.
The Best of Times …
… The Deferred Months.
Nicosia predicted that the grains markets are about to become flat, which may open some doors for cotton acreage to stabilize, then rebound. “The prices (for grains) that they are offering you two years out are not any higher than the prices they are offering you today, and in some cases they are lower,” he explained. “For cotton, the prices they are offering you today are continually getting higher into the future.” The result, he said, was that the spread between profitability in the grains markets and cotton is beginning to narrow.
Also, cottonseed prices have been mirroring grains prices – tripling since the 2006/07 marketing year – increasing cotton’s profitability at the same time. “One of the things people have been forgetting is that cotton doesn’t just produce cotton – it also produces cottonseed,” said Nicosia. “If you look at the prices of cottonseed, it’s like growing a little bit of soybeans at the same time.”
People, Nicosia said, are comparing the prices of cotton futures versus the price of grains futures. “What they really need to be doing is comparing revenue,” he explained. “A cotton futures chart has nothing to say about the yield increases – we are growing 33% more cotton than we did just five years ago. Relatively, the price could be 33% lower and we could still be even.”
Nicosia also predicted that world cotton acreage would remain flat. There will be a drop in the U.S. to 9.4 million acres this year, but increases is West Africa and Australia will offset that. But even despite flat acreage and increased yield globally, world stocks will drop over four million bales from the end of the 2006/07 marketing to the end of 2008/09 due to increased consumption. Over that period, consumption will increase by 7.5 million bales.
In the U.S., Allenberg’s estimates for 2008/09 are that beginning stocks of 8.7 million bales will drop by nearly half, all the way down to 4.5 million bales.
So it’s time, Nicosia said, for cotton growers to think strategically about the future. “The function of the market is to provide carriers on the board by pricing nearby cotton cheap enough to sell it, and at the same time buy more cotton acreage in the deferred months,” he said.
Simply, the nearby months are going to feel the weight of the 8.7-million-bale carryover, but the deferred months – especially December 2009 – must maintain a price high enough to ensure cotton supply can meet demand.
“The best of times is still ahead,” Nicosia said. “Don’t sell your cotton equipment – you are going to need it next year. The party is just getting started.”
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