There is “a really big increase” in overall cotton demand globally, and if projections for the new marketing year hold, it will be the most cotton that has ever been consumed worldwide, says Hank Reichle, executive vice president of the Staplcotn cooperative at Greenwood, Miss.
“We’re finally climbing above the demand levels we had before the recession and $2 cotton,” he said at the joint annual meeting of the Mississippi Boll Weevil Management Corporation and the Mississippi Farm Bureau Federation Cotton Policy Committee. “Certainly, a highlight of this year is the fast rebound we’re seeing in cotton consumption.”
Reichle, who had extensive experience in exports and marketing with Staplcotn before assuming his present role, says, “We’ve got good numbers this year in terms of supporting cotton price. Ending stocks are set to go down from 85 million at the beginning of the current marketing year to 77.8 million a year from now, July 31, 2019. This is happening because consumption is on the rise.
Looking back over the last 19 years, the 5.5 percent year-over-year growth in consumption we saw in 2017 is really outstanding. We’re projected to grow at 3.9 percent in the current year, which is also outstanding when compared to the average in the five preceding years of just 1.5 percent.”
World production in 2017 was good, he says, “but the good news is that there was really good demand for it. And this year, even though there will be more acres planted worldwide, the current expectation is that there will be 1.5 million fewer acres harvested. A lot of that has to do with the expected reduction in west Texas due to the severe drought situation there.
7 MILLION BALE SHORTFALL
“We’re expecting a pretty good global yield, but on fewer acres that will mean less production. So, we’re looking at almost a 7 million bale shortfall this year in matching consumption with production. If you’re producing less of something that you need, that tends to support prices, and more than anything that’s why we’re seeing cotton prices today in the 80s rather than the 60s and 70s. We’ve never had this much demand before, so we’ll have to grow more cotton to meet it.
”Looking at the change in world production this year versus last year, Reichle says, the U.S., China, and Australia are leading production downward. “We’ve planted more acres in the U.S., but we’ll harvest fewer acres. Last year, we had the highest U.S. average yield we’ve ever had, simply because of Texas. But we’re not going to replicate that this year.”
China had really good yields two years in a row, he says, “but this year, they were off to a rough start in one of their major growing regions. They’ve got a good crop right now, but it’s just not going to perform like it did in the previous two seasons. In Australia, they have to catch rainwater to irrigate and they’re not getting any rain, so next year they’ll have a lot fewer irrigated acres because they won’t have the water.”
On the consumption side, Reichle says, “We’re seeing really strong growth globally — and Bangladesh, China, India, and Vietnam account for 83 percent of that growth. I just got back from Bangladesh, and they are continuing to add machinery in their mills.
“We’re seeing really strong growth globally — and Bangladesh, China, India, and Vietnam account for 83 percent of that growth. I just got back from Bangladesh, and they are continuing to add machinery in their mills."“They’re the second largest garment exporter in the world behind China. They continue to need more cotton, polyester, and other fibers because they’re vertically integrated — they spin the yarn, they assemble the garments, and ship them off to Europe and the U.S. They don’t grow much cotton there, only about 100,000 bales, so every time they add more machinery in their mills they need more fiber to keep that machinery running. They’ll continue to be larger consumers of cotton and larger importers of cotton.
“India is also growing, but Vietnam is growing at the fastest rate. What’s amazing about Vietnam is that their growth rate has been increasing for several years now. A lot of that is a result of Chinese and Korean firms that are increasing their cotton consumption, but they’re doing it at their mills in Vietnam.”
TARIFFS AN UNCERTAINTY
The only projection in question for the current marketing year, Reichle says, is China, “and that’s because we really don’t know how things are going to play out with the tariffs situation. We know that USDA adjusted China’s consumption numbers for three years.
“We feel China’s numbers have been understated for those years, and that the USDA adjustment was justified. We’ll just have to see if the tariffs impact their ability to keep consumption up this year. We’ve been seeing continued demand increases in the Far East over the past few years, and that’s expected to continue in the current year.”
China had a huge buildup of stocks that overhung the market for several years, he notes, “but they’ve been drawing down those stocks over the last four or five years. We’re finally getting world stocks down, and even though they’re still high, they’re getting more in line with historical norms.”
In the U.S., Reichle says, “When we have about a 20 percent stocks-to-use ratio, and when we start to get below that we really see the market start to shoot up. If we look at the years when we’ve had really strong price rallies, they correspond with low points in stocks-to-use. We’re not too far off that right now — with a projected 4 million bales ending stocks number, we don’t have a lot of room in the U.S. to further draw down stocks, and that’s a good position to be in.
“The only number that’s really questionable is stocks outside China. Many in the trade think the USDA continues to overstate stocks in India, the largest cotton producer in the world. We think the number looks a little more bearish than it really is. In the U.S., which is dependent on cotton exports, we continue to see exports very strong, which tends to make us think there aren’t as many stocks in other exporting countries. So, the balance sheet is pretty favorable for U.S. cotton today.”
