Two dollar a pound cotton is now in the past, but its influence worldwide continues to drive the price, the demand for cotton products and the planting intentions of farmers worldwide.
In the time since two dollar a pound cotton shocked the entire world, the industry has seen a record expansion in global acreage, a contraction of demand and a historic effort by China to build reserve buffer stocks.
Joe Nicosia, CEO of Allenberg Cotton Company, says the confluence of these events is creating one of the largest global ending stocks of cotton in history and huge uncertainty as to what will happen to it.
Speaking at the recent Southern Cotton Growers and Southeastern Cotton Ginners meeting in South Carolina, Nicosia said, “The shortage last year was so severe China decided to begin a campaign to rebuild stocks in its state reserve. By the time the reserve is satiated with 2011/12 cotton it will have taken 15 to 18 million bales off the market.”
Two dollar a pound cotton created a shockwave in demand for cotton products — and not in a good way for farmers.
The price for synthetic materials remained stable at about a dollar a pound, and the world market reacted to the dollar price differential by gearing up to produce more synthetic material.
Though it may appear demand for cotton is strong worldwide, in reality it is the artificial demand created by China’s drive to build its domestic supply. Without the buying frenzy of the Chinese, the demand for raw cotton would reflect the downturn in demand for cotton products.
By planting time in 2011 cotton prices had declined to around $1.20 a pound, but was still high enough to encourage a huge increase in acreage worldwide.
Cotton growers world-wide responded to these prices with an 11 million acre increase. Worldwide, the cycle appears to be repeating itself this year.
Mother Nature tried hard
Mother Nature tried to compensate for over-planting, but did not succeed. Despite the worst drought in history in Texas, another flood in Pakistan, and poor late monsoon season performance in India, a record crop of more than 123 million bales is projected to be grown this year.
Worldwide, about an 11 million acre increase is expected for the 2011-2012 crop. The largest increase in 2011 came from the U.S. with 3,759,000 acres, followed closely by India with a 2,531,000 acre increase.
China by comparison had a 792,000 acre increase and Australia a 218,000 acre increase.
The expected crop production from the 2012 crop will add another 12-15 million bales to what could be an already high carry-over year. Much of the result of the increased production will depend on how aggressive China is in further building its cotton inventory.
Last year China paid about $1.18 a pound for domestic cotton, which made room for plenty of dollar a pound U.S.-grown cotton, Nicosia says.
For the 2012 crop, it’s hard to know what the market price will be, though it is clear demand for cotton products will not match the jump in production, he adds.
In response to a spike in demand for cotton products in 2008-2009, Chinese textile mills increased production, forcing China to sell 16.6 million bales of its reserve stocks to Chinese mills to satisfy demand.
By October of 2010, the Chinese cotton reserve had dwindled to less than 1.5 million bales. The shortage in cotton in China’s reserves coincided with the spring 2011 jump to $2 a pound cotton.
China reacted last spring by offering $1.18 per pound for Chinese-grown cotton for the reserve. When prices began trading on the international market at less than $1.18 a pound, China began purchasing cotton from other countries to build its reserves.
As of early 2012, the Chinese had already purchased more than 11 million bales and are expected to continue to build reserves to 15-18 million bales this year.
Nicosia says the 2012 world ending stock of cotton is an ‘abundant illusion.’ Of the 58 million or so bales in carryover stock, China’s state cotton reserve will hold nearly a third, he notes.
New crop cotton is arriving on the market this winter, but it’s not being accompanied by new demand.
As cotton became scarce in 2011/12 prices had to move to over $2 per pound to ration the available supplies. It was hoped that with the arrival of fresh new crop supplies some of this demand would return. Instead poor business conditions exacerbated the situation.
Despite lower cotton prices, demand forecasts have continued to sink due to numerous macro-economic events. Consumption during 2011/12 is similar to 2008/09 at the trough of the global recession, Nicosia says.
USDA figures support the cotton industry leader’s contention about decreasing demand.
In May of 2011, world cotton consumption was trending at about 119 million bales. By January 2012 the same trend line had dipped to less than 110 million bales.
The 10 million bale drop in world demand for cotton is based on two factors, Nicosia says.
Switch to synthetic fibers
As cotton prices rose, mills switched to synthetic fibers for many uses, especially non-apparel items. Coincidentally economies weakened and total off-take also went down.
Rebuilding market loss to synthetics will be a key to future demand. Support for programs like Cotton Incorporated will be essential in rebuilding world markets.
A key to building demand for cotton also will be how quickly the European Common Market responds to poor economic conditions.
Some of the drop in demand may be a deferred drop that is tied closely to the spike in cotton prices. Robust retail sales in the 2011 Christmas season further depleted stocks of apparel products and may create a slow increase in demand worldwide.
Cotton prices of $1.30 or more last spring and 90 cents or more in the fall provided the incentive for India, Brazil, and Australia to expand cotton area.
Three years ago these countries produced 31 million bales. This year they are projected to produce 42 million bales.
As will be the case for increased production throughout the world, most of the increase in production will be exported. However, excluding China, world import demand is down by about 14 percent.
In 2011-2012 India, Australia and Brazil are expected to export nearly 19 million bales, more than double the amount the three countries exported in 2010-2011.
By comparison, the U.S. exported about 14 million bales of cotton in 2011 and is on track for a similar amount for 2012.
Although the U.S. wound up with ending stocks of 2.6 million bales last season, it took a lot of sales cancellations to achieve the result.
Between April and August last year the U.S. had cancellations of 1.3 million bales. The 2011-2012 ending stock is currently forecast at 3.7 million bales, and increased buying from China or crop failures in other parts of the world could drive stocks lower, Nicosia says.
With 89.9 million acres of cotton and normal yields, the world is likely to produce 121-126 million bales in 2012/13, Nicosia says.
If consumption can manage a 4 percent recovery to 114.4 million bales, another 7 to 11 million bale surplus is possible. If such a surplus does happen, the only entity willing to hold it will be China’s reserve, Nicosia adds.
In the U.S. a substantial decline in acreage is projected.
Ethanol is likely to continue to demand 40 percent of the U.S. corn crop and keep corn stocks low and prices high.
Corn isn’t feasible in much of Texas and in the Southeast non-irrigated corn yields are traditionally low, so these areas are likely to account for more than 75 percent of cotton acreage in the U.S.
As for marketing strategy for the 2012 crop, Nicosia says, “For 2012/13, when the market provides you the chance to lock in a desirable return, take it.
“If you want to speculate on longer-term higher prices, buy a call.”