Anthony Tancredi has been in the cotton business a long time. Never, he says, has he seen anything like the cotton market over the past year.
Tancredi is president of Allenberg Cotton Company in Cordova, Tenn. Speaking at the recent Southern Cotton Growers meeting, he says, “When CNBC starts playing cotton everyday, you know things have changed. Even on their website, cotton is listed as the No. 1 commodity.”
“I’ve had more people ask me about cotton in the past year than in the previous 24 years I’ve been in the cotton business,” he adds.
“Cotton is in a volatile marketing situation and as long as it remains this way, the best thing for a grower to do is to always expect the unexpected,” Tancredi says.
How did we get into this situation? The worldwide depression officially ended in June 2009, and cotton prices jumped from 55 cents a pound to 75 cents a pound. Worldwide, more people planted cotton.
“Cotton supply worldwide went from being scarce to being a shortage and cotton jumped to $1.50 cents a pound and insanity was the normal course of action in the cotton market. Most of the moves we see now are based on emotion, not on economics,” Tancredi says.
“There is a lot more interest in cotton globally. Supply is low, demand is high and prices follow demand. What cures high prices? High prices! Demand for cotton has slowed, but it’s slowed much slower than anyone expected,” he adds.
“For what seems like forever, we were side-ways with cotton. No matter how much demand there was globally, someone always had cotton to sell. At the end of last year, there was a massive draw down on supplies and for the first time in memory nobody had cotton to sell. That’s the situation we’re in now, Tancredi says.
Nothing highlights worldwide cotton like the U.S. cotton industry. The carryout is incredibly small — just over one month usage in the U.S. Whether these numbers hold up for the rest of 2011 is the big question.
Stocks to use ratio in the U.S. is a record low. Maybe for the first time in modern cotton history there just simply isn’t enough cotton. Prices in the spot market and the futures market are incredibly volatile. Prices for cotton are moving around 10-15 cents, the differences in the spread just don’t make any sense,” Tancredi contends.
Slow economic recovery
Continued high unemployment and real problems in the housing industry have slowed economic recovery in the U.S., compared to other countries, especially Asian countries. One segment of the U.S. market that is showing a comeback is the apparel market, the cotton expert says.
“People in the U.S. may not be buying big ticket items, like cars and houses, but we are beginning to see an increase in purchasing of clothing, small appliances and other smaller ticket items,” he adds.
Inventories for apparel items are low — maybe because of a lack of buying during the recession by apparel stores. Or, maybe because too many stores went into the recession with low stocks to sale ratios and kept supplies artificially low to cope with the reduction in sales caused by the downturn in the economy.
Now, demand is up. Over the past Christmas season, demand for apparel goods was higher than projected and supplies were low. The result is demand apparel goods helps fuel the frenzy in the cotton market.
On a global basis, demand for apparel goods is rising to meet the demands of a skyrocketing increase in middle class populations in China, India and other rapidly developing economies around the world.
“The supply problem was further complicated by China cutting back on cotton acreage, then suffering weather-related cotton yield reductions on top of the cutback in acres. China, India and other heavily populated Asian countries cannot afford to have food supply problems, and they will likely always err in production on the side of having too much food versus having too much fiber,” Tancredi says.
“In China, this past year, internal prices for cotton were at times 90 cents a pound higher than cotton they bought from the U.S. To bring that high price down, the Chinese bought cheaper cotton from the U.S. and other countries.
“So, the U.S. has a big export volumn of cotton going to China. And, we have a record low carry-out from last year’s crop. There appears to be no way to fix the supply problem and that has fueled the frenzy in the cotton market, Tancredi adds.
Record import levels
In December 2010, China imported 450,000 tons of cotton — by far the highest ever. If they set a record for imports, it doesn’t seem rational that this increase would be for one month, one time only. So, the fear of the unknown has added to the craziness in the cotton market.
“If $1.50 a pound doesn’t stop the Chinese from growing cotton, what will? If the internal price of cotton in China spikes again, the Chinese will buy more U.S. cotton and as long as it’s cheaper than the internal price of cotton in China, then the price isn’t too high,” Tancredi explains.
India was supposed to be the great savior for the cotton market. They produce more cotton and higher quality cotton, but the salvation didn’t come. The Indian government, fearing there would not be enough Indian-grown cotton for the Indian textile industry, put a halt on cotton exports.
“In the U.S. in January we were on track to need 28 million bales of cotton, later in the year that number dropped to 25 million bales. Last year we had a 1.9 million bale carryover on a 15.8 million bale crop. The numbers just don’t add up for a 25 million bale crop in the U.S. —not even with a two million acre increase in cotton planting.
“If the world truly needs that much cotton, the only solution is to force someone out of the user market,” Tancredi says. That too, isn’t likely to happen, he adds.
“If India doesn’t get its act together and those bales aren’t available for export, where will all those export bales go — they will go to the next available supplier — the U.S. How high will that kind of demand push prices and the answer is we don’t know,” Tancredi says.
“Though many people think the profitability of cotton is bringing huge amounts of new acreage into the crop — that’s just not happening worldwide. In the Southeastern U.S., cotton is still the most profitable crop. In the Delta, corn is still the top crop. So, whether we see the 13 million acres of cotton that some are projecting remains to be seen,” the cotton expert says.
“We will see some increase in cotton in the U.S. Other crops are bidding up prices to protect acreage. Growers can pick which crop is most profitable based on the kind of land they have, the kind of equipment they have, the proximity to markets and many other factors — not just on price.
“My best guess for U.S. cotton is a 20.5 million bale crop. Add the carry-out to that crop and we’re at about 22 million bales for the 2011 season. Take two million bales out for carry-out to keep the market from going crazy again. Take out domestic use, about 3.6 million bales out, and we will have about 16.8 million bales to export next year,” Tancredi says.
The big question for U.S. growers is will the world need 16.8 million bales of U.S. cotton? “There will have to be some substantial proof that demand for cotton will go down and cotton supplies will go up to cause cotton to sell for less than a dollar pound. If that doesn’t happen $1.50 a pound may not be high enough, Tancredi says.