The cotton market could take a bullish turn once the world recession starts to lift, and textile mills suddenly have to start refilling pipeline supplies of cotton, says Joe Nicosia, chief executive officer of Allenberg Cotton Co., speaking at the Mid-South Farm and Show's ag update session.
Nicosia also said the best way to describe the last three years in the cotton market is the movie Groundhog Day, in which a television news reporter keeps reliving the same day over and over, but still retaining the memory of what happened in previous days.
Cotton's recurring theme in the United States is that for several years in a row, cotton prices have usually looked good in the long-term, but never could quite get over the short-term hump of large supplies.
“But over the long-term, low prices cure low prices, and bad news cures itself too,” Nicosia said.
For example, surveys point to a substantial decrease in acreage in China for next year, Nicosia says. “We've said the key to cotton coming back in price is to stop the expansion of production in China and India. Those expansions have been so big that their increases in production were more than compensating for our decreases in production. For the first time, it looks like China's acreage is going to go down.”
He added that the governments in India and China are holding 25 million bales priced at 16 cents to 27 cents over current New York futures prices.
How China and India resolve this problem and how much cotton acreage they plant “are going to be key factors for prices over the next four months. Are those stocks going to be brought to market at the world price, or held, so they can absorb the world price to satisfy their demand?”
Production for last year's U.S. cotton crop may come up short of USDA's estimates, according to Nicosia. “Our numbers are at 12.8 million to 12.9 million bales. Consumption at 3.8 million bales is probably a pretty good number. It would infer stabilization in the economy. It's not a recovery number.”
U.S. exports for 2008-09 at 12.1 million bales “is not an easy number to come up with. We have some in our office who are projecting it could drop to 10.8 million bales. Where we are today actually points to about 13 million bales. We continue to sell a lot of cotton because India is out of the market. We believe that will change though. India will start to flow into the marketplace. But that's okay because the marketplace needs it.”
Nicosia projects U.S. ending stocks for 2008-09 at 7 million bales.
For 2009-10, Nicosia projects a domestic crop of 14 million bales. “We don't see as much of a reduction in planted acreage as you've seen in other reports. But there will be a large uncertainty in this number, not because of planted acreage but because of conditions (including dryness in Texas).
“If you apply last year's harvested acreage and yields to this year's acreage, the crop comes out at 10.8 million bales. So if we plug 10.8 million into the balance sheet, it gets really scary.”
Nicosia projects 2009-10 exports at 11.9 million bales and says domestic consumption will stabilize at 3.7 million bales. “That gives us a carryout of 5.4 million bales. So do we go back to Groundhog Day — ending stocks go back to 8 million because the crop comes in at 16 million bales and exports go to 10 million bales? It's possible.”
On the other hand, “recession has contracted demand so greatly and emptied the pipeline so quickly that when this ends we are going to have a quick rebound. When the economy turns around, you not only have world consumption going from 110 million bales to 120 million bales, you have to throw 6 million bales on top of that for the pipeline. When that happens, a bullish outlook could unfold. We have to get past this recession first.”
Nicosia believes that could start to happen as early as the fourth quarter of this year. “But whenever it happens, it's going to be rapid and drastic.”
Nicosia noted that in the last two years, the commodity markets have been defined somewhat by the ethanol boom.