Nicosia cited the 2001/02 marketing year as an example. “The United States had roughly an 8.1-million-bale carryout. Consequently, prices collapsed 40 cents. Over the next few years, the United States began to work down the carryout, to last year’s 6.2 million bales.
“At that time, world carryout was starting to shrink and yet the United States still had sufficient amounts of cotton,” he said. “As U.S. carryout dropped to 4.3 million bales, prices rallied to 56 cents.”
At that point, the market had to decide if the United States would control the price or if the world would. When the focus changed to what was happening in the world – the short Chinese crop, demand building and shrinking stocks – prices responded accordingly.
“The focus on what determines where price is going is very important in the marketplace,” Nicosia said. “We went from a U.S. focus to a world focus. The United States did not change much in its carryout number, but price changed substantially.”
World cotton situation
As the 2004 season nears, keep one eye on world cotton area, which has been responding to higher cotton prices in 2003 and is expected to increase again in 2004, he said.
Chinese growers are perhaps the most price responsive growers in the world, Nicosia noted. He’s expecting that Chinese cotton area will increase 14 percent in the 2004/05 marketing year (Aug. 1-July 31), after a 22 percent increase last year.
Nicosia expects world cotton production in 2004/05 to reach a record 103 million bales on about 89 million acres. That’s roughly 10 million more bales than in 2003/04 and 15 million more bales than in 2002/03. “Today, we’re facing a fairly tight world stocks situation and fairly adequate U.S. stocks,” he said. “We’re looking at world stocks restored to more adequate levels and U.S. stocks to become burdensome.”
Nicosia noted that China’s growth in the textile business “is now starting to crowd out consumption not only in the United States, but in Turkey, Pakistan, India and other areas that at first seemed immune to the growth there. Now they’re starting to feel the same pinch.”
On the other hand, the growth in world consumption is starting to slow down, according to Nicosia, whose company is based in Memphis.
China has not grown enough cotton to satisfy its consumption for four years, a trend that will continue in 2004 with China expected to produce slightly over 29 million bales and consume 32 million bales. “However, China’s increase in acreage and cotton production in 2004 is going to ease the cotton shortage they’ll have. Even with that, large-scale imports will be necessary.”
He noted that China will not import as much cotton as it did in 2003, “but it will still be the largest importer in the world by a substantial margin,” Nicosia said.
Part of the reason for the latter is that China’s interior cotton prices are significantly above world cotton prices, according to Nicosia. “There is no doubt that if China had free importation of cotton, it would be buying millions more bales than they’re buying today. But they’re involved in a quota system, and we have to wait for those quotas to be allocated.”
But no doubt, it’s one of things to focus one, according to Nicosia. “Cotton prices are closely tied to China,” with some of the highest prices coming during times of increased imports, and lower prices when China removes itself from the import market.
Nicosia said that record exports by the United States in 2003 were due to “an immense foreign (minus United States) production/consumption deficit of over 16 million bales in 2004.”
Prices and world acreage will rise in 2004, however, and the production/consumption deficit is going to fall to less than 8 million bales, according to Nicosia. “Because of that, U.S. exports are going to fall from the record levels of where they are today.”
Nicosia expects U.S. cotton acreage to be close to National Cotton Council estimates of 14.76 million acres, with substantial increases in Oklahoma and Texas. That acreage would produce a crop of roughly 18.2 million bales, with a low estimate of 16.8 million bales and a high of 19.5 million bales.
For 2004/05, Nicosia expects domestic consumption of 6.1 million bales, and exports still strong at 11 million bales. Stock rebuilding around the world will somewhat offset the change in the world production/consumption deficit.
U.S. ending stocks would come in at 5.8 million bales, “which is getting up to a number that is a little bit burdensome.”
Nearby prices are totally dependent on the level of imports in China, according to Nicosia. “The market needs to see additional import quotas out of China to have any kind of price rally in the old crop. Current import quotas out there are already priced into the marketplace.”
Nicosia believes those import quotas will happen at some point. “China is having to pay the highest price in the world for their cotton. That would make them uncompetitive, and the industry in that country is too important to allow it to go through cash flow problems.”
With U.S. stock levels still tight, “new crop prices have to be higher than they would have been if sufficient acreage is to be planted,” Nicosia said. “Any major crop failure, and cotton prices would go immediately to 90 cents.
“I see a period of extreme price volatility. We’re going to focus on small world stocks and at the same time the potential for a 103 million bale crop, which could overwhelm the demand that’s there and create a situation that is extremely bearish.”
A large crop, assuming normal weather “is going to cause the U.S. and world stocks to grow and lead to a drop in prices in 2004/05. My suggestion to growers is to look to the opportunity to hedge or sell their crops and to be sure to buy call protection against price volatility or any kind of crop problem in the world.”