What is in this article?:
- Cotton needs a deficit in world production next year
- Two factors in cotton prices
- Allenberg CEO Joe Nicosia says the world has to get cotton production and consumption back in sync.
- Over the last two years, ending stocks have been building as consumption declined due to the economy.
- Higher cotton prices have added to consumption woes, as textile mills have resorted to blends with higher percentages of cheaper polyester.
Two factors in cotton prices
Two factors keeping cotton prices relatively high in the meantime are Chinese government policies and the recent spike in corn and soybean prices.
Nicosia noted that China is building a huge reserve of cotton, and is paying its domestic producers $1.25 a pound. This reserve has effectively taken a lot of surplus off the market, to the point that it’s created an artificial tightness.
Nicosia says without the policy, “the United States today would already be in complete shambles, just like it was eight years ago. China is saving you every single day. And that’s not even their intent. Their intent is to save their farmer and their industry. But their policy has been carried out so poorly that they are actually your greatest savior today.”
In the past year, China has imported 23 million bales of cotton, and bought 15 million bales of its own cotton. China had hoped that by importing cotton for their reserves, they could take cotton off the market, force world prices much higher, then sell cotton at a lower price to their textile mills. But the policy isn’t working because the surplus in the rest of the world is too big.
“China is making policy that is hurting them,” Nicosia said. “They put the support price too high and they don’t know how to get rid of the (excess cotton).
While China’s policy did not succeed in pushing prices higher, it has help put in somewhat of a floor under prices. Without China buying our exports, Nicosia says, “our carryout would be at 6.5 million bales and you cotton would be going in the loan at sub-50 cents.”
Rising corn and soybean prices are also working to keep cotton prices high, Nicosia said.
Traditionally to escape a surplus situation, the market “drives cotton prices to 50 cents, takes people out of the industry, crushes farm income and gets people out of farming cotton. With corn and soybean prices at $8 and $16, cotton will lose acres, but we’re just redirecting our assets to other crops.”
A possible change in China’s leadership dynamics, which could happen this fall, could affect its reserve policy, according to Nicosia. “So far the cotton policy in China has been to support the grower with high cotton prices, and whatever is happening in the domestic textile industry is just a by-product. We think the new leadership may give more attention to the industry side of the equation. That should help increase consumption, possibly increase the blend levels and allow China to start eating into the reserve surplus.”
In the meantime, the world does not need more cotton, Nicosia said. “The key is that we have to produce a deficit in 2013-14. We cannot continue to add to the surpluses in the world. At some time, China is going to release that cotton into the world. If they sell their reserve when the world is in a surplus situation, our exports could go down to 8 million bales, maybe even smaller, and our carryout goes to 8.5 million. They would basically shift excess stocks from China to the rest of the world. If they release the stocks when the rest of the world is in deficit, it’s okay.”