Waiting for the Future
March 12, 2009 By Anna Mullins
The next issue of Cotton International Magazine is heading off to print soon, but it’s certainly a hard issue to claim is “complete.” It seems that, as soon as I collect market analysis and opinion from industry experts, another stimulus bill is passed, more cotton is being procured by governments, or more import taxes are being changed. And then the whole story needs to be re-written and a whole new analysis needs to be considered. The truth is, we are all struggling through a time of great uncertainty and no one is quite sure what the landscape of international cotton will look like when it is all over.
The only definitive response to the many question marks facing us is our knowledge that we must be patient, flexible and optimistic. The next issue features an interview with Cliff White of Queenslandcotton, in which he says, “At the end of the day, there are still going to be cotton growers, there are still going to be cotton merchants, and there are still going to be cotton mills. Now, what that industry will look like in two years, five years, ten years, I have no idea. But there will be an industry. What we’ve all got to do is wait and see what structure comes out of this and adapt to that, whatever that is.”
While this may seem simple, it is surely something good to hear right now. Taking a big picture view of the future of the industry is the most logical way to look forward right now. I recently had the opportunity to listen in on Joe Nicosia, CEO of Allenberg Cotton Co., giving a talk toU.S.producers. His views impressed me because they were both realistic and critical, while being optimistic and broad.
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,”Nicosiasays, explaining the dimming prospects for cotton as the economy stalls.
“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 theU.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.
“The drop in the demand forecast so far is bigger than the size of this year’sU.S.estimated cotton crop,” he warns. In the five recessions of the last 35 years, world cotton demand has never fallen by more than six 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,”Nicosiasays.
He continued by talking about the projected activity ofIndiaandChinain the coming few years, specifically noting the rise of government control over cotton. “We are in a non-free market situation,” he says. BothIndiaandChinahave been purchasing cotton above the world price and putting them into their reserves. He expects that, as these governments buy domestic cotton, the world will turn to theU.S.for its supply. As a result ofChina’s government buy up, mills are importing cotton.
Indiahas the same problem.Indiaestablished a Minimum Support Price at about 60 cents; so far its agencies have bought about 8.7 million bales. They cannot sell this cotton for export without discounting it heavily in today’s market. Similarly, if they do not discount if for domestic sales, Indian mills will be uncompetitive. With exports, the government will hold huge reserves.
But there was realistic optimism in his presentation, as well. He also mentioned that, though demand seems to have sunk dramatically, the contraction in the pipeline, coupled with lower take-off, is what has really caused the severe reduction in consumption. When demand returns – as he says it inevitably will – six million bales will be needed to replenish the mills’ pipelines. “This will be in addition to the increased bales required by the recovery’s rise in demand from consumers,” he says.
“Apparel sales are actually only down about three percent. The difference is the retraction in the pipeline. When the demand recovers and businesses restock the pipeline, the recovery will be equally sharp.”
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,”Nicosiasays.
You can read more on Nicosia’s Market Outlook in the next issue of Cotton International Magazine, as well as other industry commentary and opinion from around the globe.
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