When statistics on U.S. cotton ending stocks and exports finally start to come into focus, the cotton market could turn explosive, according to Joe Nicosia, CEO of Allenberg Cotton Co., speaking at the Cotton Roundtable in New York City.
“For the last couple of years, the cotton market has been tantalized by forecasts of insufficient acreage, higher demand and bigger production deficits for the deferred months. And in each of those years, the forecasts for the tightness have faded, and the end result has been the largest carryouts in 40 years.”
Nicosia noted that in 2006, USDA initially forecast U.S. carryover at 5.4 million bales, dropped it to 4.9 million bales in July and to 4.6 million in September, “and we were almost off to the races. However, after that, our carryouts went from 5.4 million to 9.8 million bales, an increase of almost 5 million bales.”
In 2007, USDA forecast a carryout of 5.8 million bales, which eventually grew to 10.2 million bales, an increase of 4.5 million bales.
For 2008, USDA forecast U.S. carryout at 3.7 million bales. By July, it had already risen to 5.3 million bales. “It doesn’t take a rocket scientist to figure out that the carryout will continue to grow until we get a burdensome supply again for this year.”
The culprit for the rise in carryout has been fading export prospects, according to Nicosia. Two years ago, USDA’s forecast for exports declined from 17 million bales to 13 million bales. Last year, the forecast declined from 18 million bales to around 13 million bales.
The good news is that developing world fundamentals could help to buck this trend, according to Nicosia. World cotton area for 2008-09 is down to its lowest level in six years with rising grain and oilseed prices leading to large-scale reductions in cotton area worldwide.
Among countries joining the United States in shifting from cotton to grain are China, India, Pakistan, Turkey, Egypt, Greece and Spain. Cotton area fell in Egypt by 50 percent, Greece, 20 percent, Syria, 20 percent, Turkey, 30 percent. Meanwhile West Africa is increasing acreage 20 percent and Australia could be up well over 300 percent due to improving water prospects.
Crop prospects are very uncertain in India, which has contributed significantly to world gains in production over the last few years. Some of this is due to the aforementioned high costs, Nicosia said. Another is due to unsatisfactory (so far) monsoon rains. “The crop today is at a very critical stage and needs rain immediately. If not, the crop could be a disaster, and U.S. exports would be the largest beneficiary of that.”
In addition, two unfavorable developments could reverse the trend toward higher yields in some countries, according to Nicosia. “One is that the cost of agricultural inputs has risen sharply. India is struggling with the high cost of fertilizer and will see a cutback in its use of it. Two, sharply higher transport cost for inputs in countries like Brazil (which have to import those inputs) will cut into profits.”
Brazil’s production is expected to be down 500,000 bales, Egypt, down 500,000 bales, Syria, down 250,000 bales, Turkey, down 500,000 bales and the United States, down 5 million bales. Only partially offsetting the declines are Australia, up 1.5 million bales, China, up 500,000 bales, West Africa, up 1 million bales and Pakistan, maybe up 500,000 bales.
China again is the key variable on the demand side for U.S. cotton, and lately it’s been a massive disappointment, Nicosia noted. “In 2006-07, USDA originally estimated China’s imports at 18.5 million bales. In July, they moved it up to 20 million bales. The final import numbers were 10.8 million bales, 9.2 million bales less.
“In 2007-08, USDA’s first estimate of China’s imports were at 20.5 million bales. But July, it was 16.5 million bales, and today they’re at 12.25 million, and we think it’s closer to 11.5 million. That’s another 9 million-bale drop off the forecast imports for China.
“The 2008-09 season is continuing that trend as USDA initially forecast 17 million bales of Chinese imports and that is already down to 13.5 million bales.”
The difference between statistics and reality usually shows up in USDA tabulations as “unaccounted for” bales, which often proves to be additional production and/or reduced consumption. “These statistical adjustments will account for all the slippage in the balance sheet. As that happens, the screws will be tightened and we will finally drive it in. At that point, the numbers will finally reflect reality.”
According to Nicosia, the numbers are starting to do just that. And this means the market may have to start paying attention to the fact that the world will consume as much as 8 million bales more than it will produce in 2008-09.
Another key indicator of U.S. export prospects is the difference between foreign production and consumption, and it has risen to a 20.6 million-bale deficit, “a very scary number, especially when you measure it against the U.S. export estimate of 14.5 million bales, Nicosia said. “So we have to ask ourselves if the screws have been tightened all the way down on the statistics. Or do we need one more year of adjustment? This will determine if the cotton market is really set to take off.”
Cotton prices could start to sizzle in 2009 if U.S. cotton acreage does not start to recover. “If we start the year with roughly 5.5 million to 6 million bales, and we maintain all our planted acreage, we will get a production of 14.7 million bales, a carryout of 6 million bales and a total supply of 20.7 million bales.
“If domestic use drops to 4.4 million bales and exports stay around 15 million bales, all of a sudden we will find ourselves with an ending stocks figure of 1.3 million bales. That number is impractical, but it will be extremely bullish on prices.
“In 2010, if U.S. domestic use is maintained at current levels, which is very possible due to the domestic support payment in the new farm bill, we could find ourselves with a projected negative carryout of a 500,000 to 1 million bales.
“I don’t think I can make this point any stronger,” Nicosia said. “If the 2008-09 statistics look like they’ll hold together this time, then the market will have to react, and it will have to react long before the planting of the 2009 crop in order to attract cotton acreage back into production away from what is now profitable grain production.”
Nicosia added that depending on the level of participation, the 2008 farm bill’s new average crop revenue election, or ACRE, program, “may prevent the recovery of cotton area in 2009-10 and subsequent years because the higher prices for grain will be locked in and used as protection for production going forward.”