If you’re looking for a reason to be optimistic, look to cotton.
“Cotton is a lot easier topic this year,” said Jeff Johnson, Allenberg Cotton Company, at the Feb. 8 Agribusiness Conference at Arkansas State University. “I’ve been praying for the last three or four days that the market wouldn’t come down before this presentation. Opportunity is everything — if you’re involved in cotton today, I know you’re as happy as me. We have some opportunity back in our commodity.”
The market has been “on a pretty good run lately. It’s in the mid-70s for old crop. The issue for us is the demand for U.S. cotton is booming. This year, we have the fourth fastest sales pace since 2005. So far, in week 26, we’re already at 10.2 million running bales. That’s because the competitors we normally face at this time of year — African, Brazilian, Australian, even Indians — are just not available.”
During the second week of February 2016, “we were at 6 million bales. We didn’t make 10 million bales in the entire 2015 crop year.”
Cotton has also attracted speculators. “We’ve been fortunate to have excellent participation by these guys over the last six months. The total open interest, the number of futures contracts outstanding in cotton, is 280,000, which comprises 28 million bales of open interest in our futures market. That’s odd because our entire crop is only 16 million bales. That gives you some perspective on the kind of participation we’re getting from speculative interests.
“This is second-highest open interest since March 3, 2008. The cotton people remember that date when, on an unchanged balance sheet, the market went from 68 cents to $1.08 and back to 38 cents in the course of about three weeks all on speculative interest.
“What drives these guys to our market is the quest for yield. They’re looking for a higher return in commodities; it’s better than fixed income, better than equities to some extent, is less risky and, especially in an inflationary environment, it’s the place to be. We’ve been lucky to have them.”
The market is also experiencing the highest non-U.S. participation in history. “That’s known as ‘other’ in the spec/hedge report and you can track it easily. The (Chinese) market, the CCE, closes about midnight (here), then they spill over into ICE futures. They trade the two markets against each other as an arbitrage. Their participation is big, focused and well-funded.
“Small markets like ours — cotton is a very small market in terms of total dollars — with flat board structure, allows them to invest in cotton and roll their long position forward. They go from the March contract to the May contract to the July contract. When the market structure is flat, they get free time value — they get to hang around for free. In the old days, … there were big carries and it was hard for a speculator to be invested and roll his long position forward because he was giving up 2 cents every roll.”
Don’t let an opportunity pass you by, said Johnson. “Cotton prices are up since mid-December by 700 points. If you have old crop, that’s free money and I urge you to take advantage.”
Area/ending stocks drop
In addition, the market is up “because the world cotton area is starting to do its work. Since 2011-12, we’re down 22 percent in world area. Most of that has been because of China, which is down 46 percent. Separate the two and the world is down 8 percent.”
The world is consuming more cotton than it’s growing. “In 2015-16, we grew 14 million bales less than we consumed.”
The world ending stocks are also headed in the right direction, said Johnson. “If you look back at the pre-reserve days, from 2000 through 2008 or 2009, you’ll see the world is comfortable with 40 million, 50 million, and even 60 million bales of ending stocks. That went out the window with the Chinese reserve buying and the world carryout was driven up to 110 million bales in 2014.”
World surplus, down from 90 million bales, “doesn’t have to reach 30 million for prices to react. What we need to do is get world stocks down to around 60 million bales.”
“Obviously, the Chinese reserve is still the issue. … Last year, ending in September, the reserve auctioned off 12.2 million bales of stock. Their total volume was around 50 million when they started. Now, it’s around 37.8 million bales.”
While the Chinese stopped the auctions last September, “they will start again on March 6 of this year. They made the window so they don’t compete with their own growers. If they auction another 12.2 million bales, we’ll have the reserve stocks in September down to 25.6 million bales. One more auction of 12.2 million in 2018 and the reserve problem will be solved.
“The Chinese growers were paid $1.20 per pound of cotton during the reserve buying days. Even then, their acreage was falling. In 2012, the Chinese planted about 12 million acres and had a nice crop with 34 million bales. This year, they planted 6.5 million acres and were down to a 22 million-bale crop.
“They’re moving people to the cities. The urbanization plan published in 2012 says the Chinese government wants 100 million farmers to move into metro areas by 2020. They want to move 250 million farmers by 2025.”
Why the exodus from farms?
“Farmers on the farm aren’t consumers. Farmers in the city are consumers and the manufacturing sector wants to be dependent on their own middle class. So, they plan to move folks off the farm to cities and make consumers of them.”