The U.S. cotton industry finally has begun taking steps to address the over-supply issues that have kept cotton futures in the 60-cent range. But it may take three or four years for the U.S. and world markets to work themselves out of the “strange” situation they face.
And one of the biggest hurdles will be for the cotton industry to reverse the trend toward greater use of manmade fibers in active wear, says Joe Nicosia, cotton analyst and executive vice president of Louis Dreyfus Commodities LLC.
Nicosia’s comments came during Ag Market Network’s Cotton Roundtable Discussion at the Intercontinental Exchange headquarters in New York. The annual late summer update session for the cotton market outlook is sponsored by Cotton Incorporated, Bayer Crop Sciences and Farm Press Publications.
“I think it’s important to understand the dynamics of the marketplace from what is happening in the world today, and why we’re in this strange situation,” said Nicosia. “We all know there is a 100-million-bale carryout, and we hear a lot of talk about that it’s 1) locked away in China; 2) doesn’t really effect anything in the rest of the world; and 3) remaining stocks are super tight so prices can rally.
“In reality, what happens is that when prices do start to rally, if they rally too soon, the United States becomes uncompetitive, and all that cotton that is being held in India – all of a sudden it becomes competitive and cheaper and takes our market share away from us.”
Meanwhile, as prices weaken and as China continues to roll out its reserve stocks, “there’s no panic in China,” says Nicosia. “They know if they run short of cotton, they can buy it tomorrow. They have a supermarket of cotton offered to them every single day.”
More cotton to sell
Another factor occurs when the market realizes the U.S. has extra bales to sell. “It doesn’t help if growers and merchants hold cotton,” Nicosia notes. On the other hand, “When the price goes down, and it goes below the Indian support price, U.S. growths sell.
“So we’re bound by these two groups, and the only way we’re going to change that is that either the United States is going to have to go down to sell, and we have so much to sell and it keeps going lower. That’s not going to happen with the crop in a 13- to 15-million-bale range; it’s going to have to be in a 16- to 17-million-bale range.”
USDA currently is forecasting U.S. production of 14.5 million bales for 2015. Other analysts speaking at the Roundtable session said the Texas crop could go higher than expected and push production above 15 million bales.
It could also happen if India decides to end its subsidy program or China changes its policies, neither of which, Nicosia believes, is likely.
“Unless we can really push the U.S. crop to 16 million bales or drop it back to 13 million bales (due to unforeseen weather events), I really don’t see the situation changing. So from 62 to 58 cents we sell U.S. cotton. When we go to 67 or 68 cents, we stop.”
U.S. cotton producers will continue to be faced with this pricing dilemma as long as the price of polyester and other manmade fibers remains significantly below that of cotton in China, according to Nicosia.
Access to cotton ‘strangled’
“The key result of the China policy that we’ve seen both past and present is that the access of Chinese mills to competitively-priced cotton has been strangled,” he says. “And, as a result, they have turned to spinning polyester. The cotton blend in China has gone from 53 percent just five years ago to 39 percent, and the result of that is China’s cotton use is down 9 million bales.”
Adding to the blend problem in China is the fact that Chinese companies produce more than 70 percent of the world’s polyester, and its polyester staple fiber plants are only operating at about 63 percent of capacity, Nicosia notes. Its polyester fiber costs about 42 percent less than cotton fiber.
“So the mills there have a strong incentive to buy and run synthetic fibers instead of cotton,” he said.
It would be nice to think the demand for natural cotton fiber would have caused a shift in the sourcing of apparel from polyester-heavy products made in China to cotton-rich products from India and Pakistan. “
“But that hasn’t happened,” Nicosia says. “Five years ago the percentage of U.S. textiles and apparel imported from China was 47 percent. Last year it was 48 percent. So, clearly, we understand we buy what they make. You only have to look at what consumers are wearing in the U.S. to understand why.”
The first indication of the uphill struggle the cotton industry faces is in a category referred to as women’s bottom wear.
“You go to a shopping mall today, and you look around and see what women are wearing. If you had been there 10 years ago, what would you see? Women wearing jeans and cotton-rich garments such as skirts and blouses and cotton slacks. If you go today, you see leggings, tights, yoga pants and leisure wear that is increasing in popularity even with men.”
Lighter fabrics prevailing
In the last five years, he said, the United States has imported 42 percent more tights, imports of yoga pants are up 32 percent and imports of women’s jeans are down 10 percent.
“To add insult to injury to the cotton use, woven finishes are moving to lighter and lighter fabrics,” he said. “Today a pair of jeans weights 15 percent less than it did just five years ago. Many of the products competing for women’s bottom wear are composed primarily or entirely of synthetic fibers.”
In 2015, the percentage of textile and imports into the United States that are primarily cotton has fallen below 50 percent, down from 58 percent five years ago. In just those five years, the United States alone has seen a 14-percent loss in cotton consumed. Overall the total imports of cotton textile and apparel are down 11 percent. That has occurred while total U.S. imports of apparel are up 9 percent.
“The European Union is in a similar situation, he noted. “Surely, cotton’s biggest enemy is the blend level and manmade fiber.”
For more on the July 24 Roundtable discussion, go to www.AgMarketNetwork.net.