Were the huge world cotton crops of 2004 and 2005 simple flukes or have world producers achieved a new plateau for yield? According to Joe Nicosia, president and CEO, Allenberg Cotton Co., the latter could be the case. “Clearly yields have reached new minimum levels, with the majority of yield increases taking place in Pakistan and India.”
The push toward higher yields has made forecasts difficult for USDA's statistical services, noted Nicosia, speaking at the Cotton Roundtable, at the New York Board of Trade in New York City.
For example, USDA began 2004-05 with an estimated world crop production of 102.5 million bales. “We ended that year with 120 million bales. We had a phenomenal increase in yields everywhere — the United States, Pakistan, India, and just about every country that grew cotton.”
In 2005-06, “the question was whether those yields were real or not. Was it just a one-time event, or have we really entered into a new (plateau) because of new seeds and new farming practices that are taking place? That year, USDA's first estimate was 107 million bales of production. Today, they think it's going to be 114 million bales, up 7 million bales.
Nicosia believes world production this year will edge slightly higher than last year to around 115 million bales. “That could change depending on weather — we have a lot of growing season ahead of us. It could go up to 119 million to 120 million bales, or it could drop down to 105 million bales. The problem we have in forecasting prices is that the difference between these ranges of production equate to ranges of 20 cents in futures prices.”
Nicosia estimates production in the United States this season of somewhere between 21.4 million bales and 21.6 million bales, a range larger than most trade guesses. “We're not quite as pessimistic about prospects in Texas. I would be very surprised if the Texas crop comes in under 5 million bales.”
The impressive growth in yield and production around the world has been overshadowed by only one thing — staggering world growth in cotton consumption, especially from China.
“China no longer grows enough cotton for its own consumption, and that's not going to change,” Nicosia said. “Land for cotton production is fairly limited. Producers tend to make small increases or decreases in acreage and tend to be very responsive to price. Every additional bale of consumption is going to have to be filled by bringing in more imports.”
Nicosia noted that over the last 5 years, world cotton consumption has grown an average of 4.5 percent every year, which equates to roughly 5 million bales a year. “That's a lot of use every year to add to the balance sheet and it creates the demand for additional production each year.
“In 2004-05, world cotton use grew by 10 million bales in a single year,” said Nicosia. “We've never seen anything like that. We were very lucky that that happened because that same year, the world crop grew from 102 million bales — which would have been a disaster price-wise — to 120 million bales.”
Two-thirds of the increase in cotton consumption has come from China. “From 1999 to 2004, China has been responsible for the majority of growth in cotton use around the world, increasing its consumption by 16 million bales. In the last two years, we've also seen a resurgence in cotton use in Pakistan, India and Turkey, where consumption has increased roughly 5 million bales.”
Nicosia projects another strong increase in world cotton use for 2006-07, to around 120 million bales. “The world has grown that much cotton only once, in 2004, so it's going to put a lot of strain on the production system. The growth in use in the world is really going to be a driving force, not only this season, but for the next several years.”
With 55-cent cotton, the biggest challenge for cotton is to maintain acreage, according to Nicosia. “If we plug in another 5 million bales of consumption in 2007-08, we would have a world consumption number of about 125 million bales, 5 million bales larger than the largest crop ever produced in the world. To get anywhere close to those types of numbers, we are going to have to maintain our acreage and/or increase it around the world, and we have to maintain our yields.”
At some point, supplies of cotton in China have to be reconciled, according to Nicosia. “In 2007-08, we start with a world carryin of about 48.7 million bales and production of 119 million bales. We're actually not plugging in a 5 percent increase in consumption for 2007-08, so we're looking at consumption of 122.8 million bales.
“In 2007-08, we end up with 48.1 million bales of world carryout. When you look at those figures, the numbers don't add up (the carryout should have dropped by over 3 million bales), and this is probably the largest problem fundamentally that we have in the cotton market today.”
Essentially, over the last five years, 11 million bales of unaccounted supply has been added to the world balance sheet, due to discrepancies in China's accounting system.
“Every year for the past five years, China appears to be running out of cotton, and every year, they do not run out of cotton. So something is wrong with the numbers. We don't know what it is, but it's something that everybody is trying to deal with.
“One of these years, we'll finally get the numbers down in China, where they're absolutely out of stock and we'll be able to reset the balance sheet at zero and start over.”