By Jim Steadman

Did you or your kids ever read books that gave you a choice of endings for each chapter? Choose wisely and the hero could move on to fight another day. Make the wrong choice and, well…

To a certain extent, that’s been the story of the cotton market for the past 12 months – without having the opportunity to pick and choose the storyline. So many factors lined up in the world to create a volatile and often frightening year for cotton.

“We had quite a few shocks to the system, and we had to deal with them,” said Joe Nicosia, Senior Head, Cotton and Merchandising Platforms and Executive Vice President of Louis Dreyfus Commodities, LLC, in his annual cotton outlook presentation during this year’s virtual Mid-South Farm and Gin Show. “Last February, we said that some of the threats that exist are things we can’t see. Little did we know the path it would take us down.”

Looking Back

Nicosia noted that there were a lot of questions as the 2020 season began. What impact, if any, would the coronavirus have? Would China continue to buy cotton as part of the Phase One agreement – and if so, how much? How would India’s Minimum Support Price impact export channels?  Would China use imports to build their reserve or continue to sell their reserve? What about moisture in Texas?

“Of course, the coronavirus exploded, and you saw the impact it had on consumption,” said Nicosia. “But one thing we did say last year is that once the epidemic was over, pent-up consumer demand was going to return. We’ve seen it before as stocks are reduced. Since 1997/1998, we’ve seen back-to-back consumption declines three times. And every time, we’ve seen a strong rebound.”

A year ago, it looked like the U.S. had the opportunity to export more cotton than ever in history – which became all but impossible following a 90-day world shutdown.

“But, we continued to export a great deal of cotton around the world, and we still had one heck of a year,” pointed out Nicosia. “We knew we had huge risks on both sides of the market and that prices were going to be quite volatile.”

There were also issues to overcome with the U.S. crop, primarily 30 named storms during an extremely active hurricane season – many of which targeted cotton production areas – and a drought monitor for west Texas that moved from no drought in January to extreme drought by December.

Signs of Recovery

World consumption and exports have both started to recover. As Nicosia said, there’s plenty of cotton in the world. It’s just not in the right spots or the right cotton that’s in demand by the world’s textile mills.

“U.S. accumulated exports look good,” he noted. “We’re on a record pace, but we do think they’ll slow down with prices moving up to where they’re at. Accumulated commitments to sales are also very high, and we continue to accumulate sales for this year and the year forward.

Export estimates are also showing strength.

“When the U.S. crop shrunk last year, exports dropped from 16 million bales to a low of 14.6 million,” said Nicosia. “We continued to make sales even though the world had a lot of cotton. But a great deal of it was tied up in China and India, and the world turned to the U.S. and Brazil for cotton.

And don’t sleep on Brazil. Nicosia describes them as a formidable competitor in the export market. Their cotton is now considered to be as contamination-free as U.S. and Australian growths. And with increased capacity and efficiencies now in place, Brazil is now poised to meet more of the world’s demands at the expense of the U.S.

Rosier Outlook for 2021 and 2022

One thing’s for certain – cotton is going to have to fight for its share of acres with corn, soybeans, wheat, peanuts and other crops. Cotton, by far, suffered the most from the world’s pandemic shutdowns, while prices for grains and oilseeds – and interest in growing them – moved up substantially.  But in the past 12 months, cotton prices have crept up to now sit just behind soybeans on a relative basis.

“We’ve made a great comeback,” said Nicosia. “Since March of last year, cotton has outperformed all other commodities. When you look at variable returns, the return per acre for cotton is higher than other commodities that are cheaper to grow and have a higher percentage return on variable costs. But from a pure dollar standpoint, cotton is actually the most profitable crop to grow.

“But we believe we’re still going to see some rotation into corn and soybeans because of the cost structures that exist and for people who pre-booked pricing. But it’s going to be a good story because the alternatives are all good. Sometimes growers have to choose the best of the worst alternatives. This year, they have many good choices to choose from.”

For 2021/2022, Texas will determine the size and potential of the U.S. crop. Nicosia believes total acreage can climb to 12.5 million acres with a potential for 20 million bales – but likely closer to 17.5 million bales if there are problems in production and yields.

“The big question in front of us is are red hot prices going to freeze out demand?” he said. “In old crop, we think prices have already destroyed some the U.S. demand in the short term.

“In my opinion, the new crop is where the excitement could possibly happen,” he continued. “I believe new crop acreage is going to be bigger than recent estimates due to price increases, and we’re going to need it. We believe the demand for December and forward for next year’s crop will be higher than the demand we currently have in old crop. I don’t see how prices can go down very much until west Texas is assured of planting moisture. If west Texas remains dry, I think prices explode.”

How much higher? Nicosia said easily over a dollar – maybe more if it doesn’t rain in Texas and if China steps up to fulfill its Phase One commitment.

“I know I often say it, but please consider using options as part of your price protection plan to help protect your risk, because you’re going to need that,” he urged. “Anytime we’re over 80 cents, we’re in an unstable situation.

“I think we’re in for a very interesting year. And I think we’re in for a scary year until it rains in west Texas.”