By Jim Steadman 

Charles Dickens’ “A Tale of Two Cities” spoke of the best of times and the worst of times while capturing the turmoil of the French Revolution in Paris, a safe haven offered by London, and, of course, the ultimate personal sacrifice.

When looking at today’s cotton market, one could make the comparison that we’re looking at the best of times and worst of times from a different perspective.

Hopefully, heads will not roll.

In his annual market outlook presentation during the Mid-South Farm and Gin Show, Joe Nicosia of Louis Dreyfus Company said that today’s “two cities” are Export Sales versus Export Shipments.

“When we look at the sales we’re making today, it’s the best of times,” he says. “But when we look at what we’re actually able to ship in the world, it’s the worst of times. When we look at export sales, we can see light at the end of the tunnel. But when we look at how fast we’re shipping it, we see a season of darkness.

“Reality is we’re doing good. People want our cotton, and we’re able to sell. Historically, we have one of the five highest commitment years to date. But our export shipment pace is far behind the five-year average. Right now, we can’t even get close.”

Nicosia points out that in this 2021/2022 marketing year, the U.S. has shipped 4.6 million bales versus the current USDA projection of 14.8 million – 32.7% of what’s needed to meet the export goal.

“If we look at our shipments now as a percentage of our total commitments, we are way behind the 3, 5 and 10-year averages,” he notes. “We have to ship more than 400,000 bales a week to get to that USDA estimate. It’s only been done once in history, in 2017. But the question is, can we do it under these levels of supply chain problems that we have?”

To be sure, every country is having international shipping issues. But, the U.S. also has accentuated problems on the domestic side to deal with. Lack of warehouse labor. Shortage of truck drivers. Insufficient fleet containers and chassis. Higher drayage rates. Railroad labor shortages. Late pickup of bales. An acute shortage of ocean containers in key loading areas.

Recent BMAS (Bales Made Available for Shipping) reports show that warehouses across the U.S. have almost 900,000 bales available to be picked up. Yet over 300,000 bales a week are not moving out of the U.S.

“Those are our problems, and we need to fix them,” says Nicosia. “The silver lining is that if we can solve this situation, we can move a lot of bales really fast, even with higher freight costs (U.S. up “only” 25%) and crazy vessel scheduling and restrictions.

“We have inefficiencies from resources,” he adds. “Fifteen million containers left the ports empty in 2021. That’s 100 times the total volume of containers we need to ship the entire U.S. cotton export number. And some vessels won’t even go to certain countries anymore, so we have huge increases in costs. These logistical problems could shave thousands of bales off our U.S. exports. If we can’t get our bales sold and shipped, Brazil and Australia are going to take markets away from us.”

The Main Competitors

Let’s start with the main target – China.

For many years, China has dominated the world textile market. But up and coming countries like Vietnam, Pakistan, Bangladesh, and India have been chipping away at China’s textile dominance. In 2006 and 2007, China had more than 20 million bales more than those countries combined. Today, those countries handle 20 million bales more than China.

“I think Chinese consumption has an uphill battle to fight,” explains Nicosia. “It has flatlined over the past 20 years. It’s no longer the engine of the growth of the textile business. It’s still a substantial market, but it’s no longer a growing one. China is a deficit country, using more cotton than they produce. And as their reserve stocks start dropping, China is going to have no choice but to buy their deficit. So, China is now back, and they will be back every year.

“That’s good news. But how much good news is it?”

The U.S. should be poised to hold on to a piece of their current Chinese market. But we’ll have to battle heightened challenges from Australia and Brazil for not only China, but also for the emerging markets in Vietnam, Bangladesh, and Pakistan.

Here’s why.

Australia has recovered from the drought of the century, during which they produced only about 600,000 bales annually. Last year, the rains returned, and Australia now has enough moisture for at least two more years of cotton crops at maximum capacity. Their production is expected to increase 10x up to roughly 6 million bales.

Brazil has continued to expand agricultural land, their yields, and double cropping. Brazil now grows the majority of its cotton as a second crop behind soybeans. Production of more than 13 million bales is anticipated, with roughly 8.5 to 10 million bales per year going to export.

“Those two countries combined now produce more cotton than the U.S.,” says Nicosia. “Their combined export number is equal to the U.S. We’re fortunate in that cotton’s not here yet, but it’s coming. And it’s coming to compete with the U.S.

“The good news is that world consumption of cotton is continuing to grow.”

What Do the Numbers Say?

During its 2022 annual meeting, National Cotton Council economists pointed to several key factors that will shape the U.S. cotton industry’s 2022 economic outlook.

The global economy recovered at a much faster pace than expected as COVID-19 restrictions were relaxed, and world economies reopened. Strong world cotton demand has resulted in the highest cotton prices in a decade. Yet, caution is still recommended due to potential volatility due to the continued impacts of the COVID-19 pandemic, rising energy prices, supply chain disruptions, geopolitical tensions, higher than expected inflation, and slowing economic growth.

The results of the NCC Annual Planting Intentions survey projects 2022 U.S. cotton acreage to be 12.0 million acres – 7.3% higher than 2021. Based on the state-level 10-year average abandonment rates and five-year average yields, 2022 harvested area is estimated to be 9.8 million acres with an overall abandonment rate of 18.9%. U.S. production is estimated to be 17.3 million bales with an average yield of 850 pounds per acre, which includes 16.8 million upland bales and 438,000 extra-long staple bales.

World production is estimated to increase to 122.6 million bales in 2022 due to higher acreage. World mill use is projected to increase to 125.9 million bales for the 2022 marketing year, which represents an all-time high for cotton demand. With expanded consumption in key importing countries, world trade is projected to increase to 48.3 million bales.

U.S. exports are projected to increase to 15.8 million bales in the 2022 marketing year. When combined with U.S. mill use, total offtake exceeds expected production, and ending stocks are projected to fall to 3.1 million bales. If realized, U.S. stocks would represent one of the lowest levels in the last 20 years.

Those numbers are likely to be adjusted as planting begins. In its preliminary acreage projection, USDA expects 12.7 million cotton acres. Dr. O.A. Cleveland, in an interview in the March 9 episode of the Cotton Companion podcast, believes pressure from other healthy commodity prices and unknowns from the Ukraine conflict will push the final cotton acreage number into the 12.2-to-12.3-million-acre range.

Is the Market Still Bullish?

For the most part, yes. But we’re going to need a good U.S. cotton crop in 2022.

“Cotton prices are great,” notes Nicosia, “but so are the prices of everything else. Looking at the Mid-South as an example, the returns on everything, except peanuts, are substantially higher. And what about the returns on your variable costs? If you’re making almost the same money but are able to invest substantially less in soybeans and corn than you are in cotton, your return on your variable costs looks better for grains side than for cotton.

The good news is growers have a lot of good choices, even with cotton prices at a dollar,” he says. “I think we’re going to see more people stay with their traditional rotation because they can make money in everything. I just don’t think we’re going to have this giant influx of cotton acres into the United States unless we get water in West Texas. We are back where we were last year in West Texas at this point with the drought situation. We’re in a critical condition in the most important spot in the world with the highest concentration of cotton production.”

Make no mistake. At these prices, there’s a lot of risk in the marketplace. But short of rescuing rains in West Texas and/or an unexpected black swan event, Nicosia doesn’t believe new crop prices have much room to go down.

Exports will remain heavily influenced by Chinese buying. And don’t forget the always present threat from man-made fibers (although recent increases in oil prices have helped close the price gap between cotton and polyester).

“If Texas production has problems, new crop prices will exceed this year’s prices,” concludes Nicosia. “There’s high volatility. I can easily see the price changing 25-to-50 cents for cotton, and that’s not only in one direction. We have quite a few major influences of things that are here. $1.00 to $1.20 is not an area of equilibrium.”