The numbers are mind-boggling, says Hank Reichle: 85.5 million bales of world cotton stocks for the marketing year ending July 31, the second largest ever, and a year from now, 95 million bales — “by far the largest we’ve ever seen.
“Right now, 86 percent of next year’s projected world consumption is already sitting in the world’s warehouses,” he said at the joint annual meeting of the Delta Council Ginning and Cotton Quality Improvement Committee and Southern Cotton Ginners Association.
Those numbers would normally be “so bearish, it’s unbelievable,” says Reichle, vice president of export sales and market administration for Staple Cotton Cooperative Association at Greenwood, Miss.
But it’s not as bad as it otherwise would be with such staggering stocks-to-use figures, he says, because “the Chinese government owns most of that cotton, and in the rest of the world — the U.S., India, Pakistan, everywhere else — stocks are relatively low. China represents about 30 percent of the world’s cotton consumption, and while that’s a lot for just one country, the other 70 percent of mill use is outside of China.
“In the rest of the world, there’s not an excess of cotton, and as long as China is willing to hold all that cotton off the market, it helps keep world cotton prices much higher than they would be otherwise.”
In the years ahead, Reichle says, China will have “a tough balancing act” in determining how to work its way out from under that massive oversupply.
The situation is a marked contrast, he says, to the early 2000s, when cotton was trading for 50 cents to 60 cents a pound, with a precipitous drop to 28 cents in 2001.
“Then it started to creep back up, and in 2009 mill use exceeded production by 17 million bales. We had a true fundamental rally that year, from about 48 cents a pound to more than 90 cents a pound — a lot of demand for cotton and not a lot being grown.
“The market didn’t stop at 90 cents or even the long-dreamed-of $1; it went to $2 a pound. Unfortunately, producers didn’t benefit from the $2 price, and it hurt consumption. The price dropped back to 70 cents a pound.
“That volatility caused two things to happen — growers planted a lot more cotton and mills used a lot less. Anytime there are big increases in production without a corresponding increase in consumption, you’re going to add to supply, and that’s why we now have such a global oversupply.
“In 2011, we had a world high production of about 124 million bales; a farmer could book cotton at $1.40 a pound before he even grew it. But consumption was going down. And while we’ve reduced production, we’re still way off our usage highs; our problem now is not production, but rather lack of consumption.”
$1-plus to Chinese farmers
In 2011, Reichle says, consumption in China “really dropped off the face of the earth. The rest of the world is consuming as much cotton as ever, but China is the big problem.
“They have a policy right now of buying cotton from their farmers at a futures prices equivalent of more than $1 per pound. But they’re not willing to turn around and sell that cotton to textile mills at a market level price.
“At the same time that they have the highest price for cotton in the world, they have the cheapest man-made fiber price in the world. The trend since the 1950s is of cotton being used less in total fiber consumption; in the last 12 years, cotton has lost almost 10 percentage points in global fiber consumption. That trend accelerated in 2011-13, when China decided to support their cotton at a high price, which made polyester just that much more competitive in the world’s largest textile-producing country.”
Over the last decade, in years when there were 60 million bale carryouts and stocks-to-use ratios of over 50 percent, cotton prices were cheap, Reichle says.
“In 2009, we got stocks down to 26 million bales with a stocks-to-use ratio for about two years around 20 percent. That was pretty bullish. But in the 2011-13 period, we’ve increased stocks every year, while consumption hasn’t been increasing.
“Since 2010, which represented a very tight period, when cotton truly was worth $1 or more per pound, stocks have massively increased. In 2010, China owned very little of that cotton; everybody else had it. Now, the rest of the world owns less than it did in 2010 when things were tight, and China is Pac-Man, gobbling it all up.
“But China uses only 36 million bales per year, and at the end of the 2013 marketing year they’re projected to have 60 million bales sitting in warehouses, plus they’ll have their own crop coming on top of that.”
Although there’s “a big-time oversupply in China,” Reichle says, “Things aren’t very bearish when we look at stocks outside of China. In the rest of the world, there’s not an excess of cotton. In fact, if we look at 2012-13, it’s the tightest time we’ve seen in recent history outside of China.
“That’s why we have cotton prices at 85 cents per pound instead of 55 cents — we’re trading more on the limited amount of cotton that’s available to the market than stocks that actually exist.”
So, what does it all mean to Mid-South cotton acreage 2014 and beyond, where acreage has dropped like a lead balloon over the last eight years?
“The Mid-South has the lowest acreage this year in a long time — perhaps the lowest ever,” Reichle says. “Georgia has more cotton acres this year than all the Mid-South states combined. We’ve already cut cotton production in the Mid-South by record levels. Will it go lower? A lot depends on grain prices and on what China does?
Who'll grow the cotton?
“Who’s going to grow the cotton the world needs? I think there is going to be a world cotton deficit that needs to be supplied by the U.S. Will Texas cotton production go ‘way up or will they diversify as much as they can into grains? What will the Southeast do? That area is a bit more friendly to cotton and they’ve seen improved yields over the last decade. I think they will be our competition in the Mid-South. The market will buy only as many acres of U.S. cotton as it needs, so the question becomes, who wants to supply those acres at whatever price is prevailing?”
India and Pakistan are becoming more important players in world cotton, Reichle says.
“Those two countries grow more cotton than any place in the world, but they have among the lowest yields — currently less than a bale per acre. If they can increase yields through seed technology and other production improvements, they may be the ones that fill the world’s need for cotton.”
With the outlook this year for some easing of very tight grain stocks, prices for corn, soybeans, and wheat have also been easing, he notes.
“If the Chinese continue to support the world cotton price through their reserve policies, and the price stays around 80 cents a pound, and we see corn prices in the $4 range and $11-$13 soybeans, cotton could begin to look a little more attractive to our growers, and I wouldn’t expect to see a further big acreage reduction on top of what we’ve already had.
“If cotton prices should rally a bit because supplies are so tight outside of China, we might even see an increase in acreage. I don’t think we’ll see cotton going back to the acreage we had in 2006, but in 2011, when cotton prices were good relative to grain prices, we did see acreage move back up. I think Mid-South farmers will continue to respond to market signals and prices in determining the crops they plant.”
But, Reichle says, the big question hanging over the cotton market is how China will deal with its stocks that constitute the world oversupply.
“It’s their job to figure out a way to reduce that oversupply. We believe one way they will do it is to reduce their own production — that they will give incentives to some of their farmers to grow grains instead of cotton. But that will probably take a while to work its way through the system.
“They also have to do something to create more competitiveness for cotton versus man-made fibers. They can’t continue to have a huge gap between the cost of cotton and man-made fibers to their mills. They’ve got to get production down and consumption up, so they can start to work down those reserves. And through all that, they need to continue to import cotton.
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“If they should decide they’re going to cut back on imports as much as they can, that will fix the supply tightness we have outside China.
“They have a tough balancing act,” Reichle says. “They need to continue importing cotton while working down their supplies, they need to increase consumption, and they need to decrease their production over coming years.
“We think they will do this gradually, and hopefully this will keep the price outside China around 80 cents to 85 cents per pound, which would make cotton relatively attractive if grain prices continue to erode from the big premium they’ve had the past few years.”