Would “torturous” be an understatement for a description of the past three years in the cotton industry? Probably not. The explosion in soybean and corn prices drove cotton acreage to the lowest levels in at a least century. In some states, acreage reached historic lows.
“Other than the spike we had in ’08, cotton prices have just languished,” said Joe Nicosia. “It all started with food for fuel. When the United States turned to ethanol to help its energy complex, it drove acreage into corn. The subsequent action went to soybeans and it just snowballed.”
Nicosia, Allenberg Cotton Co. CEO, gives the annual U. S. and global cotton “State of the Industry” address at the Ag Update sessions at the Mid-South Farm & Gin Show in Memphis.
In the U.S. alone, cotton acreage fell by 6.1 million acres over the past three seasons. Another 3.8 million acres were lost world-wide.
“Then the recession came and gave us another blow, and it drove prices back down into the 40s,” he continued. “Finally, we had the harvest weather this past season that was detrimental to the crop in the Delta and Mid-South.”
During the recession of the past year, demand dropped by 11 million bales – a 10% decrease, and the largest loss in history.
But at the same time, world production fell by 20 million bales. “That is the key number, and the one we will focus on,” Nicosia said. “That essentially wiped out the surpluses we had. Now things are starting to change. The world is starting to need cotton. We’re coming out of the recession. So what we’ve been waiting for is finally starting to turn. We’ve been through the pain.”
Painful Past
In 2006/07, world production was at 122.6 million bales and USDA projected world consumption at 129 million bales.
“But the reality is that we only got to 121 to 122 million bales,” said Nicosia. “Traditionally you would see consumption grow with population ― 2% to 3% (annually) ― and you see a price response. But we did not. As grain prices went up, we cut acreage even more.”
In 2008/09, world production dropped to 109 million bales. “And that’s huge,” he said, “but now we’ve met the recession.”
In 2009/10, world production fell again ― this time to 102 million bales, but prices still did not respond. “The reason why is that going into 2008 and 2009, we had such a dramatic pull-down in world consumption that no matter what we did, we were not going to get ahead of the game,” said Nicosia. “Even with a massive reduction in production, we actually built stocks.”
Back to Fundamentals
Now it appears that we are moving out of the recession and the market is responding to fundamentals.
“It’s really the return of consumption that’s important,” he explained. “As we look to 2010 and 2011, our preliminary estimates are that we will see a very large rebound in production, taking us from 103 million bales back up to 117 million. But we think consumption will grow, bringing us back to close to 120 million bales, and that will be supportive of prices.”
How much of a recovery ― and the increase in cotton demand that should follow ― will depend on factors in the general economy. The indicators to watch will be the S & P 500, consumer spending, housing starts and unemployment numbers.
With world stocks reduced to less than 50 million bales, Nicosia said one thing is clear: “We need more cotton acreage. The great surplus is disappearing … we’ve eaten through the stocks in India and China. The world is on a level playing field.”
Before May, After May
Going forward, Nicosia said there are going to be two scenarios: What happens before May and what happens after May.
“Before May, cotton prices have to attract area,” he said. “We need to attract area in the United States and we need to attract area around the world. Production has fallen from 102 million bales and consumption is at 116 million. The world is going to need a minimum of 5 million more acres. There is no way we can exist with the amount of acreage we have today. And at least a third of that will have to come from the United States.”
But Nicosia cautioned that if the U.S. is not willing to plant that one-third, someone else in the world will.
Allenberg’s projections are that futures prices will entice growers to plant 10.5 million acres this spring. That compares to Cotton Grower’s survey of 9.91 million, and the National Cotton Council’s survey of 10.1 million.
“If 10.1 is right, you’re going over $1 (per pound),” said Nicosia. “That’s not enough acreage in the United States.”
What about after May?
“It’s all about yield,” Nicosia said. “It won’t be about how many acres are in the ground, it’ll be about what you have coming out of the ground.”
With no stocks in reserve or any sort of buffer, traders will be on edge and markets will be highly volatile. The threat can be real or perceived.
“Don’t be surprised if traders start to watch 6-to-10 day weather forecasts again and react to things that have not even happened,” Nicosia said. “Thirty-day forecasts will really scare people. Somewhere along the line there will be a major price move because somebody in Colorado or somewhere else is giving a prediction on how many hurricanes we’ll have or whether we’re in an El Niño or La Niña. There is no cushion if something goes wrong. The world cannot stand a crop failure.”
That weather scare can work both ways. Ideal weather all over the world could mean a record crop and lower prices; adverse weather somewhere in the world could cause a panic and a price explosion similar to what happened in corn and soybeans over the past three years.
As this market sets itself up, Nicosia said growers cannot be passive marketers: “If you are, good things will not happen. It’s critically important for you to sit down and make some decisions. Making no decision is the worst thing you can do.
“We think this is one of the best opportunities we’ve seen in years to plant cotton, and we hope you’ll take advantage of it.”