Report from the 2014 Southern Cotton Ginners Association Summer Meeting

Confused about what to do in the cotton market? Welcome to the club.

“Part of the problem is IΆm not sure if the (cotton) marketplace even knows what the questions are,” said Anthony Tancredi, Head, Cotton Platform, Louis Dreyfus Commodities, at the 2014 Southern Cotton Ginners Association Summer Meeting on July 22. “Or, maybe, they arenΆt asking the right questions in the right fashion. Sometimes you can get the right answer but it is the wrong question.

“So whoΆs in control of this cotton market? Are we back to ΅normal,Ά whatever that may be for cotton?”

Much of the confusion is due to Chinese actions. “There are a lot of questions. Are they stepping aside? Is China finally going off the grid instead of being on?”

Tancredi said the market situation is muddy despite the ability of “learned” colleagues to come up with informative data in past years. The current situation makes it “very difficult to come up with data that says ΅hereΆs what you can expect.Ά”

Pointing to a chart showing cotton futures from 2000 through 2013, Tancredi acknowledged the 2010 price spike. Following that, “everyone is talking about how cheap cotton is. ItΆs fallen out and weΆve moved back to the 70 (cent range), even into the upper 60s. But if we look at it historically, it still isnΆt really that cheap.”

Referring to the market from 2000 through 2009 -- a run when cotton barely rose above 70 cents several times -- Tancredi said, “the hardest part was back in the day when cotton was competitive with manmade fiber. One of the biggest problems I see with where the market is heading today is (following the 2010 spike) it took out cotton usage and replaced it with manmade fiber. … It was so much cheaper than cotton, which had gone so high.”

The resulting problem? Currently, “China is one of the biggest manufacturers of manmade fibers -- and (the fibers) are cheap. TheyΆre staying that course.”

Cotton must compete with manmade fibers and take demand back but “so far, China have been masters at not letting prices fall” to allow such.

Crazy carryover

The USDA says there is a 106 million bale carryover. “I could almost say ΅With that, IΆm walking out the door.Ά ItΆs completely crazy that the number has gotten that big.

“WhatΆs it really saying? Well, itΆs saying we must deal with the fact that, at some point, the world will have to deal with too much cotton. Whether China is holding it, or not; wherever itΆs going; whether itΆs used, or not used -- (the huge cotton stock) is the weight hanging over the market, right now. ItΆs calculable, people know itΆs there. And just because we donΆt know what someone is doing with it doesnΆt mean it isnΆt affecting the market.”

ChinaΆs cotton holdings are “the big elephant in the room. China will continue to be our problem in this market. Are they out and done? There are lots of rumors that thatΆs the case.

“But they are not. They may be changing what theyΆre doing, trying to change the worldΆs impression, but that doesnΆt change the fact that theyΆre firmly embedded in everything going on in cotton.”

China, said Tancredi, recently announced it would subsidize cotton production. Even so, production numbers in the nation have fallen. Why did this happen?

“They made that statement … in the far western part (of China). ThatΆs where they have San Joaquin Valley-type production with a lot of drip irrigation and enormous farms. ThatΆs the only place (the subsidies) apply. The central region in China also grows a lot of cotton but officials said (the subsidy there) would be significantly less.”

That led producers in central China to grow other crops. “YouΆre seeing 30 percent, even 40 percent, reduction in cotton in those areas.”

Sixty percent of the worldΆs cotton stocks are under Chinese control. “It has 50 percent more than the entire rest of the world. And nobody knows what theyΆre doing.”

Policy clarity

During a presentation he recently gave in China, Tancredi pointed this out to cotton merchants. “I put up a slide and said, ΅Really the problem is your policy is dictating everything and hereΆs what the world knows about that policy: zero.Ά They got really mad. … I said literally no one can tell me what the Chinese policy is.”

Why bring this up with so much emphasis? “Because, unfortunately, the laws of supply and demand have been shoved aside by a country willing to spend billions of dollars on programs that have nothing to do with economic reality.”

Despite the lack of policy clarity, at some point, the Chinese will have to clear things up. In anticipation, Tancredi encouraged all at the SCGA meeting to network. “Keep in communication with as many people talking about (Chinese actions) as possible. If youΆre talking to merchants, talk to them all. If youΆre talking to people overseas, talk to as many as possible. Somewhere in this mix something is going to come out. And when it does it will determine market direction more than anything else.”

During a visit to Memphis, a Chinese reserve delegation met with Tancredi and others. “They said the most important thing to them is price stability. They like it between $.70 and $.90.”

The delegation indicated they had no firm selling policy. Tancredi asked what would happen if the market began to fall. “They said ΅Oh, if it falls too much weΆll come in and buy again.”

Asked the ideal number of bales theyΆd like in reserve, the delegation said four million tons. Currently, the Chinese have 12 million. “They donΆt want as much cotton as they have. They donΆt know how to reduce it without being a big market factor.”

When it comes to the Chinese approach to cotton, Tancredi warned against accepting anything but rock-solid evidence. “This marketplace is full of rumor. And itΆs full of rumor being reported as fact. … In this situation, youΆre better off being second to act and getting it right than first to act and getting it wrong.”