With cotton futures prices in the deferred months inching closer to 70 cents, and with grain markets substantially off their highs, it’s possible that cotton in the United States could start to win acreage back in 2010, according to Joe Nicosia, chief executive officer of Allenberg Cotton Co.
Speaking at the annual Cotton Roundtable in New York City in July, Nicosia said, “We are already beginning to see Brazil, West Africa, China and the Soviet Union starting to price cotton out to 2010. Just in the last month, a great deal of forward contracting has been done.”
Since 2006, the world has lost 11 million acres of cotton, with the majority of that lost in the United States, at slightly over 6 million acres. China has lost 2.3 million acres, the former Soviet Union, just under a million acres, West Africa, slightly under 2 million acres and Brazil, just under a million acres.
“Nowhere has cotton acreage seen more decline than in the Delta,” Nicosia said. “In 2006, the Delta planted 4.2 million acres to cotton. Today, it’s only 1.7 million acres, a loss of 60 percent in only three years. In the Southeast, it’s not much better. Where it used to be 4.3 million acres planted, there are only 1.9 million acres. The only area holding onto its acreage has been the Oklahoma/Texas area, which has stabilized over the last three years at about 5.1 million acres.
The biggest reason for the decline in world cotton acreage is a global recession “that caused the greatest collapse in cotton demand we have ever seen,” Nicosia said. “World demand had peaked in 2006-07 to nearly 121 million bales, and world demand for 2007-08 was estimated at one time to be 129.5 million bales.”
Today, world demand has fallen from those peaks down to 110 million bales and world area has shrunk to accommodate the lower demand.
It’s difficult to forecast when the world might move out of its recession, but when it does, things could start to turn around for cotton, according to Nicosia. “When it becomes apparent that recovery is on the way, we believe that demand will quickly move up 8 million to 10 million bales, and we’re going to have to bring 5.5 million to 6 million more acres around the world back into cotton production.”
Nicosia described two scenarios for cotton’s outlook, under a continued recession and under recovery.
“Currently, in 2008-09, we expect world carryout to be 59.2 million bales,” Nicosia said. “Production and consumption are roughly in balance at 109 million bales and 110 million bales (respectively).”
Under a continued recession in 2009-10, Nicosia pegs world production and consumption at 110.4 million bales and 110.2 million bales, respectively. “When we add the unaccounted figure, which continues to grow mostly because of China, we get a carryout of roughly 62 million bales, or an increase of nearly 3 million bales.
“However, if we were to start the recovery in 2009-10, we believe consumption would jump to 117.5 million bales, leaving production the same and lowering carryout to 54.7 million bales, a very different scenario.
“As the recovery moves out to 2010-11, consumption continues its growth trend and would jump to 120.5 million bales, a fairly daunting number 10 million bales higher than the demand we have plugged in today.”
Nicosia added that under this scenario, world production “would surprisingly be at 120.2 million bales, which is enough to take care of the entire increase in consumption.”
The United States could add significant production and cotton acreage under a recovery scenario, according to Nicosia.
“In 2010-11, if December 2010 futures are in the low 70s, we think U.S. acreage will begin to recover. We’re projecting U.S. production in 2010-11 to rise to 16.3 million bales, which would lead us to a carryout under a recovery scenario of just over 3 million bales.”
Worldwide, “with December 2010 cotton over 70 cents and with soybeans and corn back down to $9 and $3.70, we think cotton is going to win back 6 million acres in 2010, including 1.3 million acre gains here in the United States.
“If the market were to move 10 cents higher, we estimate this would bring in an additional 6 million acres around the world. This would be more than necessary to meet any kind of recovery and put a cap on prices going out into the deferred months.”
Nicosia wouldn’t venture a guess on whether the economic outlook favors recession or recovery, “but the cotton market has been following the S&P (Standard and Poor’s) market fairly closely. We continue to look at jobless claims, durable goods orders, housing starts, the spread between short- and long-term interest rates and the S&P. I think it’s fair to say that the worst is over.”
Nicosia estimates the size of the 2009 U.S. crop at 13.9 million bales, substantially above the current USDA estimate (and about 1.5 million bales higher than the collective estimates of other cotton analysts at the Cotton Roundtable).
“Crops around the United States are doing very well and I wouldn’t be surprised to see record yields in a majority of the states if weather continues to hold.”