2011: The Best Year Ever
May 13, 2011 Will 2011 be the best year ever in cotton? It’s setting itself up to be, without question. That would have been almost impossible to believe three years ago.
In his annual economic update address at the Mid-South Farm & Gin Show in Memphis, Joe Nicosia had some simple and very clear advice for growers in 2011: “Plant every acre you can in cotton. The profitability potential of it is phenomenal. Take advantage of it. This is the best time ever — ever — in your life to plant cotton. You have the biggest profitability ever, and the marketplace is asking for it, which creates an opportunity. I’d sell it now.”
However, Nicosia, CEO of Allenberg Cotton Co. in Cordova, TN, offered a slight caveat: “That still leaves a lot of risk, and with that, buy a call.”
A call option would basically give the purchaser price protection if the price goes down, but leaves the potential to take advantage if the price goes up over the life-span of the option.
Nicosia said cotton profitability has now eclipsed that of corn and soybeans, even though they are also seeing extremely high prices. Because of that, Allenberg is projecting that slightly over 13.3 million acres of cotton will be planted in 2011. That would be the highest acreage since 2006 when growers planted 15 million. And it would also be up 22% over USDA’s final planted acreage number in 2010 of 10.8 million.
Why the huge jump? Obviously the explosion in cotton prices that took old-crop futures to well over $2 per pound, and new-crop prices, basis December 2011, to around $1.35. The 2012 and 2013 futures, basis December, have also gone over $1.
“As we look to 2011, who’s going to plant cotton? We could find it under trees, in ditches on the side of the road. We’re going to plant a lot of cotton,” Nicosia said. “We have fantastic profitability in cotton today.
“As I looked back at the numbers, I haven’t been able to find any agricultural commodity that is legal that has more profitability than cotton has this year,” he joked. “Acreage is going to respond.”
Nicosia said the goal in 2011 isn’t to grow a big crop. It’s to grow a massive crop.
“The world needs to grow a cotton crop so big that it can afford to have a disaster somewhere and still have enough cotton,” he explained. “We know the risk now is so great, that if we have trouble anywhere in the world, you can put a $5 bill up there. That’s a joke, but cotton at $1.30 is by far — by far — the most profitable crop to grow almost everywhere in the world.”
China and India’s profitability has tripled over what it was in 2008. And in the U.S., profit potential has exceeded that in some areas.
“In the Southeastern United States, profitability is up 300%, far surpassing the profitability of corn and beans,” Nicosia said.
“When you look at the Delta, cotton profitability is going to be back on top, and that’s one of the toughest spots to get back on top. If you look back at the past, cotton was at a substantial discount, but not anymore.”
In the Mississippi Delta, many growers can easily switch back and forth between cotton, corn, soybeans and, in some cases, even rice, to take advantage of pricing opportunities in any particular year. In 2009, for instance, corn held a profit potential of $92 per acre over that of cotton. Soybeans held an advantage of $16. But in 2011, Allenberg projects that cotton will top corn by $42 per acre, and soybeans by nearly $250.
“In Texas,” he continued, “profitability is up 350% — the largest profitability of any of the commodities. Even if you have water for corn, cotton still beats it.”
Blast Off
How did we catch a ride on the rocket ship that is carrying cotton to record heights in just a matter of months?
In his 2010 Gin Show address, Nicosia said there was no margin for error. He talked about the stocks that existed in India and China and how far they had been drawn down: “China had a reserve stock at one time of 20 million bales. It was worked off, and worked off, and continually sold to the point where they had sold everything they were willing to. As those stocks were drawn down, we had really big crops coming in the Southern Hemisphere, but they were going to be nowhere near enough to take care of the export demand that could be reached.”
“Last year at this time, we talked about (2010/11) being the year for cotton. Today we’ve witnessed the highest prices that we’ve seen in history,” he continued. “This came about because of several factors. The supply, as we go through this year both in the world and the United States, is going to be drawn down to unseen levels; the smallest stocks we’ve ever seen in history.”
At the Beltwide Cotton Conferences in Atlanta in early January, Jordan Lea, CEO of Eastern Trading Co. in Greenville, SC, and president of the American Cotton Shippers Assn., said:
“In 2007, we had a six-month residual supply of cotton, but right now we’re looking at a six-week residual supply of cotton. If you consider that there’s always about 30 days’ worth of cotton in transit – either on the ocean, on trucks, leaving warehouses — we have a two-week supply of residual cotton.”
The latest USDA report, released on March 10, pegged U.S. cotton supply at less than 2 million bales. The stocks-to-use ratio in the U.S. has dropped from 55% in 2007/08 crop year, to only 9.8% in the 2010/11 crop year — the lowest in history.
75 Cents is Cheap
As the 2009/10 crop year advanced, prices rallied to 75 cents per pound as evidence that the draw down in stocks was real. And the world economy was improving.
“Boy that sounds cheap today, doesn’t it? And you guys were happy. The world was happy at 75 cents,” Nicosia told his audience. “We had major increases in the United States, India, Brazil and Australia. But not in one key country – China. Prices were still low for all agricultural products, so acres didn’t go up in China. But that was alright. And then we had the massive flood in Pakistan, we had cool weather in China. We were looking at an early estimate of just under a 120-million-bale crop that eventually faded to about 114 million.”
The floods in Pakistan came in late July.
So if we thought a shortage was real in November when prices jumped to $1.30 per pound for the May contract (the current spot month), then we knew it was real when May went to almost $2.20.
But $1.30 is a number to bear in mind as we move into this crop year.
“With $1.30 new-crop futures, we’re going to see a massive increase in cotton acres, but be prepared for volatility — it’s going to be with us,” Nicosia said. “So with 2011 cotton pricing, it’s going to be inherently unstable. And $1.30 is far and above what it will take to attract all the acreage we need in the world. Realistically, the price is 90 cents, or $1.80.”
Dollar Cotton “The New Normal”
Has dollar cotton become the “new normal?”
“That’s a difficult question,” said Nicosia. “Some food for thought: Take a look at what happened to the wheat market, because there are some similarities now.
“Several years ago (wheat) went through a panic stage. The world was short on wheat and some people thought we were going to run out.”
In October 2007, wheat prices on the Chicago Board of Trade jumped to nearly $9 per bushel. By the end of 2008, the price was just over $6. By June 2009, it appeared to have settled in at between $6 and $6.50. But by the end of September, it was approaching $4. It’s now back over $8.
“That’s pretty good volatility and that’s what’s going to happen in cotton,” Nicosia said. “But the key thing is still ethanol. Ethanol has created a fight for acreage for all row crops. It started in corn, spread to beans, and moved to wheat.”
GET THE NEWSLETTER TODAY!
