The cotton acreage contraction in China has been one of the most remarkable developments Joe Nicosia has seen in recent years. So dramatic has been the decline that the senior head of cotton and merchandizing for Louis Dreyfus Commodities in Memphis believes China is well on its way to becoming a big cotton importer — after it unloads a huge state surplus of an estimated 52 million bales.
“Eight years ago, China was growing over 15.3 million acres of cotton,” said Nicosia, speaking at the annual Cotton Roundtable, held at the New York Stock Exchange in New York City. “This year, it’s only going to plant 7.2 million acres. Even more remarkable is that China had dropped to 10.9 million acres a couple of years ago while the state reserve was still guaranteeing $1.20 a pound for their cotton growers.”
Nicosia said most of the losses in Chinese acres have been in their interior provinces, where farmers are planting less intensive crops such as corn.
Nicosia believes the losses in acreage are permanent. “It is unlikely that we will see much of this area ever come back to cotton,” he said. “This has major implications for the market down the road, as China is the world’s largest cotton consumer.”
Output at deficit to consumption
With China’s production output at a deficit to its consumption, China’s cotton stocks are being worked down at a rapid rate, Nicosia said. “In two or three years, we could see China become an importer of 15 million bales again per year.”
According to USDA, China is expected to produce around 22 million bales this marketing year and consume around 35 million bales, creating a deficit of around 13 million bales. Most of this will be met with cotton from its reserve, although China will import about 4.5 million bales, Nicosia said.
The downside to the long-term outlook is that since 2007, cotton demand has continued to suffer headwinds, Nicosia says, “mainly due to fashion trends favoring products made from manmade fibers. And polyester is at a strong price advantage to cotton in China, which is still the largest supplier of textile products to the world.”
The biggest changes have been in women’s fashion, according to Nicosia. “Women’s leggings, yoga pants and tights are just about as common as jeans now. Similar trends have been occurring in women’s shirts. Ten years ago, the United States imported 2.8 million women’s cotton knit shirts. Today we’re importing 2.1 million. That’s a 25 percent reduction in cotton imports for women’s tops.”
Manufacturers have just been too easy to oblige to this trend, because of price and the lack of retail pushback. “Polyester costs half as much as cotton to a Chinese mill. China has an advantage to making and selling these products and people currently want to buy them. This is one of the reasons why cotton’s share has continued to struggle.”
On a positive note, the cotton blend level in China’s spinning industry “appears to have bottomed out about two years ago and is slowly coming back,” Nicosia said.