Cotton marketing: be patient, cautious, alert

Cotton marketing: be patient, cautious, alert

Patience, says Joe Nicosia. That’s what will be necessary for U.S. cotton farmers to get through what is likely to be a challenging year, and to move toward a new, brighter beginning for the cotton industry.

Nicosia, senior head of Cotton and Merchandising Platforms, Louis Dreyfus Commodities, and executive vice president of Louis Dreyfus Commodities, LLC, Cordova, Tenn., offered a bit of optimism in what has been an otherwise dismal cotton outlook for the past few yearas at an Ag Update session at the annual Mid-South Farm and Gin Show at Memphis.

“The year ahead looks tough,” he says, “but long term reserve stocks are going down, and China can’t grow enough cotton for its spinners. Be patient. Be cautious. And stay alert.”

In 2016, he recommends that growers conserve capital and watch for opportunities. “Possibly in the short term — and surely in the long term — there will be opportunities in cotton.”

The China syndrome remains in play, Nicosia says, with some of the 50 million bale reserve that has weighed on the market for the past few years likely to be released in 2016, at a lower price — possibly half what the Chinese paid. But uncertainty about how those reserves will be put on the market continues to muddy the outlook.

“There is tremendous uncertainty about China’s cotton policy. The authorities don’t want such high stock levels. How will this affect prices going forward? We don’t know.”

As China was holding these huge stocks of expensive cotton, prices in that country dropped and acreage declined. “China’s growers cut back on cotton area when their price was $1.20 a pound. They won’t start growing it again anytime soon.”

STEADY DECLINE IN RESERVES

The combination of reduced acreage and selling off stocks will mean a steady decline in those reserves, from the 50 million bale levels in 2015/16 to 13.8 million in 2018/19, and down to 9.2 million in 2019/20, Nicosia says. China has typically planted from 12 million to 14 million acres in cotton. This year, acreage is down to 7.2 million, and expectations are that will drop another 9 percent.

China’s textile blend, which has favored cheaper polyester, has also begun to stabilize. “If the blend had remained the same as before the increase in man-made fiber use, China would have already used up the reserve stocks,” he says. That polyester blend advantage took from 10 million to 15 million bales out of the market per year.

China will be importing cotton again in 2017/18, he says, with a potential average annual increase of 11.4 percent through the 2025/26 marketing year. Within five years, China is likely to import 9.7 million bales, and 15.2 million bales within 10 years. “China likes U.S. cotton,” he says

Taking China and its huge reserves out of the equation, Nicosia says, world production and consumption of cotton remain stable, with consumption currently outpacing production. With China out of the market, other buyers have taken up some slack, particularly Bangladesh. Pakistan suffered a crop disaster this year, losing about one-third of a 10 million acre crop, and had to import cotton, mostly from India. That’s not bad news, Nicosia says, since Pakistan’s purchase takes a lot of India’s stocks off the market.

ADVICE: HUNKER DOWN

For the near term, he says U.S. growers should “hunker down.” U.S. cotton acreage is expected to increase by 6 percent in 2016. “With prices for all major row crops down 30 percent from their five-year average, many growers are cautious.” In many cases, cotton looks as good as any other option.

Nicosia does caution against producing too much cotton and having a burdensome supply when China begins to deplete their reserves. “The futures market has been range-bound,” he says, with offerings from the upper 50 cent range to mid-60 cents. “The market average for the last 25 years has been 68 cents a pound. The market’s job today is to keep the area in check and to stimulate consumption. There will come a time when we need bigger crops.” Not this year, though.

He recommends that, for 2016, growers should conserve their capital, consider all their planting options, perhaps acknowledge that 58 cent December cotton is cheap and that Dec. calls might be a feasible alternative. “A small crop could be under-valued,” he says.

Cotton is an expensive crop to grow, he says, and may not be the best bet for return on cash expenses, compared to corn or soybeans. It’s typically last “when profitability is recalculated as a return on cash investment.”

OPPORTUNITIES ARE COMING

Production problems likely will be the source of any price rallies for 2016, Nicosia says. “Adverse weather could profoundly affect the situation. A market rally should come only from lower area and/or yields. Consumption is not likely to supply the impetus.”

Opportunities are coming, he says.  “After five consecutive years of global cotton surplus, the tide is turning and in the 2015/16 season we will use more cotton than we grow. World production has plummeted from an average of 123 million bales the last few years to just 101 million bales in 2015/16.”

Nicosia says U.S. cotton has a strong sustainability case to make in encouraging U.S. and other consumers to trust and buy U.S. grown cotton. Many consumers want traceability in the products they buy.

“We meet or exceed sustainability standards and we can provide that traceability for cotton,” he says. “For many we are the preferred cotton provider.  We see opportunities.”

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