Memphis cotton merchant Joe Nicosia, CEO of Allenberg Cotton Co., told producers attending the Mid-South Farm and Gin Show in Memphis that even though the impact of index funds on the market continues to baffle objective analysis, the outlook for cotton is rosy for 2009-10.
For the past couple of years, there has been a familiar theme in the U.S. cotton outlook, according to Nicosia. Cotton production ends up much higher than early estimates, while exports end up disappointing from early-year projections, driving ending stocks higher (current year ending stocks are estimated at 8.7 million bales).
In the world, there's also a theme. China's cotton production is consistently understated by an average of 3 million bales annually, while its cotton consumption is consistently overstated. “At the same time, China is making a huge commitment to man-made fiber,” Nicosia said.
“Another problem we're having in the export market is competition, mainly from India and Brazil. The Indian crop has steadily outpaced consumption for the last several years, and today they are the second largest producer in the world. They are also the second largest exporter in the world.”
Nicosia added that India's cost per acre of producing cotton is the cheapest in the world at $77 per acre. “Texas is also extremely competitive at $171 per acre.”
Meanwhile, a new prosperity is moving into agriculture, driven by the food for fuel equation. “That is what is driving the entire change in the world today. We are essentially burning food. We're burning so much of it, it's changing the dynamics of agriculture around the world.”
With cotton competing with corn and beans for acres, one solution is to follow the European Union's lead, according to Nicosia. “Since 1988, the EU has had a 10 percent mandatory set-aside. Last year, in response to tight grain supplies, the EU reduced that rate to zero. I hardly ever agree with anything the EU does, but this was one smart thing. They finally responded to the marketplace the way they should have. Yet at the same time, the United States continues to idle this land and not allow it to go into production.
“Repercussions include the loss of additional farm income. The marketplace is crying for your production, and it wants to pay you for it. We could also have a loss of global marketshare. When the EU plants 10 percent more wheat, they're going to turn around and sell that on the open market. Who's going to buy it, your customers? They're taking marketshare.”
Opening up CRP could also provide an economic stimulus at a time when a U.S. recession threatens to slow down mill use in China. “Today we know the economy is struggling. We surely could use multiple billions of dollars of economic activity today by increasing our agricultural output. All of this points to moving a certain percent of the 34 million acres into production.”
Nicosia urged cotton producers to look at more than futures charts when figuring out their crop mixes for 2008. “The futures chart doesn't say anything about yield increases. We're growing 33 percent more cotton than we were five years ago. So the price of cotton can be 33 percent lower and still be even. At the same time, the price of cottonseed and/or rebates you receive are also higher.”
Hang on long enough and prices are going to compete with those of corn and soybeans, Nicosia said. “In 2009, we start to tighten the balance sheet. We have lower acreage this year, which will decrease our crop size. If we have crop problems somewhere else, it could get interesting. Cotton is going to have to rise to a certain level to compete with the other crops.
“The function of the market is to provide carry on the board spreads in the futures markets,” Nicosia said. “The front end of the market is being driven up by the funds with absolutely no demand for cotton. The best bid we've gotten out of China today is 6 to 9 cents below where the market is.
“At the same time, there is this fear that sometime down the road, we're going to run out of cotton, that the drop in acreage is going to create a tightness. So the front end prices are going to have to stay defensive to try to sell, and the deferred prices are going to have to go higher.
“To me, if you want to be long cotton, don't be long in the spot month. Roll it out to the deferred levels and that's where you're going to take your real values. But it's difficult to tell a producer what his cotton is worth today because the futures have divorced from the cash price. Some of you may not be able to get a bid today for your cotton. I would not be surprised to see cotton futures trade beyond full carry.”
Nicosia says there's good news down the road for cotton producers. “Don't sell your equipment, you're going to need it. Last year, we told you you were getting invited to the party going on in the agricultural community. In a year from now, the party will just be getting started.”
Nicosia projects world cotton area will be unchanged from last year, but with higher yields, cotton production will grow from 116 million bales to 121 million bales, with the majority of the increase coming from India, Australia and West Africa.
Nicosia pegged world cotton consumption at 128.5 million bales, an increase of 4.2 million bales over the previous year. “We're just going to hold tight, because there is a bit of a downside to that number, as some mills are having to struggle with the cotton prices they're having to pay.”
Nicosia believes U.S. exports this marketing year could fall even further from current USDA estimates of 15.7 million bales to 15 million bales or lower. Nicosia projects a U.S. crop of 15.2 million bales this year.