U.S. cotton plantings of 10.1 million acres would likely not produce enough cotton to offset a projected world production deficit, which could bump prices substantially higher, said Allenberg CEO Joe Nicosia during an ag update session at the Mid-South Farm and Gin Show, in Memphis.
In January, that’s exactly where the National Cotton Council’s Early Season Planting Intentions Survey indicated acreage would rise to this spring, based on a recovery in cotton prices, and declining prices for competing crops.
Nicosia says the United States needs more than 10.1 million acres to offset the huge foreign production deficit which has slashed world ending stocks. Cotton prices will have to remain at current levels of close to 80 cents per pound “to get the acreage.”
Nicosia described two important periods for the cotton market — one prior to May in which futures must rise to encourage adequate acreage, and after May, when acreage is settled and attention turns to yield and weather.
Prior to May, the issue is restocking cotton supplies in the world which have fallen to very low levels. “The world is going to need a minimum of 5 million additional cotton acres in 2010. There’s no way we can (satisfy demand) on the amount of acreage we have today.”
At least a third of that “is going to have to come from the United States. So until May, futures will have to move to a level to insure that the world is going to plant this extra 5 million acres.”
Allenberg projects that U.S. cotton acreage will move to 10.5 million acres in 2010, “but my personal bias is that the number will get even bigger. But if the 10.1 million is right, you’re going over a dollar a pound. That’s not enough acreage in the United States.”
Nicosia noted that even with the additional acreage, carryout would drop from 3.4 million bales in 2010 to 3.3 million bales in 2011. “So next year, things could be even tighter than this year.”
After May, “it’s going to be all about yield,” Nicosia said. “There’s going to be a fear of shortage because there are no buffer stocks anywhere, and that’s going to keep traders wary. It means that prices are going to be highly volatile, sometimes on real activity, sometimes on the threat. There’s no cushion in case something goes wrong.”
Conversely, everything could go right, according to Nicosia. “You can imagine what your yields might have been like had it not been for bad harvest weather in 2009. The ability for us to grow a lot of cotton does exist.”
A low U.S. yield estimate of 650 pounds indicates a carryout of 1.4 million bales, Nicosia said. “I would hate to guess where prices would be with that carryout. Mills would switch a lot of product to polyester.”
An average yield of 729 pounds indicates a carryout of 3.3 million bales, while a high yield of 813 pounds indicate a carryout of 5.1 million bales, “which puts us in a comfort zone and prices would move down accordingly.”
Nicosia said the emotions of traders in the cotton market could range from “complete euphoria to sheer panic, and it’s all going to play out after May, during a period of about 90 days while we sort out what the yield is going to be.
“As a cotton grower, do not be a passive marketer in this environment. It’s critically important to sit down and decide what’s right for you, and make some decisions. Making no decision is the worst thing you can do.
“The last time prices moved up to 78 cents in December, there was a lot of activity in the cotton world. Brazilians sold forward, West Africans sold forward to 2012, 2013 in some cases. In the United States, we couldn’t get producers to make a decision.
“If you don’t make a decision, you will be left with the residual of what everybody else has decided, instead of you dictating your own future.”
The foreign production deficit for 2009-10, which is the difference between foreign production and consumption outside the United States, is expected to be 13.3 million bales, Nicosia said. “In a perfect world, this would be what the U.S. export number is.
In 2008-09, the number was 22 million bales, but instead of that being the export potential for the United States, China and India liquidated their excess stocks to fill the deficit. “They can’t do that this year. And if China or India has a poor crop, the impact on the United States and our price will be substantial.
“It’s time to make a deal,” Nicosia said. “Cotton has the smallest world crop in six years, the lowest stocks in six years, a major recovery is taking place in world demand and the carryout has no room for error going forward.”
Nicosia believes futures have to rise and stay in the 75-cents to 80-cents range to insure that producers plant enough cotton. However, above 80 cents, foreign area competition “will increase fairly rapidly. After May, all price predictions are off the table. It’s going to be completely driven by yield.”
Two factors could also affect the outlook — another dip into recession or a washout in competing crop prices.