Were the high cotton yields of 2004 the result of great genetics and good farming, or were they statistical anomalies the world will not see again for many years?
The question will certainly be a lot clearer when harvest begins this fall, but for now astounding cotton yields around the world — which led to a 23 percent increase in world production in 2004 — are causing consternation among market analysts.
Joe Nicosia, speaking at the Market Outlook Conference in Memphis, Tenn., even had two forecasts for the 2005-06 U.S. and world crops — one for trend yields and another with yields similar to last year.
The CEO of Allenberg Cotton, Memphis, expects low prices, due to 2004's large contribution to world supply, will lead to a 3 percent reduction in world acres in 2005-06.
China will be the leader in the decline and is expected to reduce its plantings by 10 percent, after increasing acreage 22 percent and 10 percent, respectively, in the previous two years.
This would produce a world crop of just under 105 million bales in 2005-06, assuming normal yields. “But we are plugging in yields that are based on historical numbers. One of the problems we have is that early last year, USDA estimated 2004-05 world cotton production at 102 million bales. We thought last February that it would be even lower.
“Today, we're at 116.7 million bales. So it's gone up 14.2 million bales, a phenomenal increase.”
The numbers were shocking not only in the United States, but around the world. China, Pakistan and India all had crops much larger than the year before, with significant increases in yield. “No one could have believed that this was possible.”
Weather conditions in the United States may have helped U.S. growers achieve record-breaking yields, but Nicosia added that the U.S. crop was hit by four hurricanes that went through the Delta and Southeast, torrential rains at harvest in the Mid-South, and a massive snow storm in west Texas.
“We have to ask ourselves if the yields that we achieved in the world last year are a precursor of what's ahead or are they complete outliers. Will we return to historical average yields, or have we turned a corner on yields, either because of farming practices, technology and better genetics? Is it a new trend or coincidence?”
A world carryout of 43.8 million bales, consumption of 107.4 million bales, and a 105 million-bale world crop, assuming normal yields, would reduce world carryout for 2005/2006 to 38.8 million bales. “On the surface, it's a tight number. If this scenario plays out, prices are going up.
“But if you plug last year's yields into the world, production jumps up to 113.3 million bales, and world carryout jumps to over 47 million bales. If that happens, we're looking at prices around 28 cents.
“Producers will see very wide, wild swings of opinions on price momentum because of yield changes. We have to deal with yield changes potentially up or down 10 to 15 percent.
On the upside, Nicosia is extremely bullish about cotton use around the world. “Currently we expect use to rise to about 110 million bales in 2005/2006. That's due to continued strong use in the Chinese cotton sector. In the last five years, China has been responsible for about 85 percent of the world's growth in cotton and textile use.”
Not all of the growth is in the flood of imports into the United States, according to Nicosia. “Westernization and fashion change has taken place in Southeast Asia, which has created a tremendous demand for its own textile products.”
China cannot raise enough cotton to satisfy its consumption, Nicosia said. “Every additional bale of consumption is another bale they're going to have to import. We can see roughly a 17 million- to 18 million-bale deficit in China that's going to have to be made up in imports.
“They need to buy around 200,000 bales of cotton a week from the rest of the world. The job of prices for 2004/2005 is to stay competitive in the export market to decrease the excess surplus. In the meantime, the heavy surplus will continue to weigh on prices.”
According to USDA, U.S. exports in 2004/2005 will come in at 13.2 million bales, slightly under the 13.8 million estimated for 2003/2004. Nicosia believes U.S. exports could easily reach 14 million bales in 2005/2006.
U.S. carryout for 2004/2005 should be around 7 million bales, which Nicosia expects to fall to around 6 million bales in 2005/2006.
Nicosia is plugging in 19.1 million bales of production for the United States this year. “However, if we repeat the yields of 2004, we come up with a crop of 23.1 million bales. One contributor to the yield last year was a lot of moisture early in the year in Texas. Well, Texas has very good subsoil moisture again this year.
“If we repeat the yields of last year, prices are going to collapse. Ending stocks could go to 10 million bales.”
Nicosia says that if proposed changes to the cotton program, including elimination of the three-entity rule and marketing loans being subjected to payment limitations, “could decimate the cotton industry. Those are major changes for the cotton industry. We have to be ready to fight.”