While it may be tiresome to continue hearing about China’s impact on the cotton market, it can’t be understated, says John Michael Riley, Mississippi State University Extension economist.
“We had about 50 million bales of carryover, but then came China,” said Riley during this year’s Southern Agricultural Outlook Conference held in Atlanta.
“Chinese inventories are definitely the story in the cotton market today. They’ve grown their carryover to 62 percent of the global share. Huge carryovers in China have a lot to do with the fact they were purchasing cotton from their growers and placing it in their warehouses. I’ve heard they paid their growers anywhere from $1.25 to $1.50 per pound for cotton,” says Riley.
China currently is sitting on some very expensive cotton compared to the current market price, he says, and it’s not surprising that their producers were willing to grow it.
“China definitely has taken the lion’s share of the global stocks. Now the market is wondering what it will do with all of this cotton. Right now, China has enough cotton to fill its needs — with their own production and stocks — for the next 10 years. They don’t have to buy any cotton on the global market for the next 10 years.”
If China sits on these stocks and doesn’t release them, then the markets will be okay, says Riley. If they let everything go, cotton prices will drop.
“China has always imported some cotton, and the imports during the past couple of years added to the fact they were growing their inventories. Production has stayed pretty consistent, but mill use has started dropping off, as some mills have gone to other Asian markets or into India,” says Riley.
Once China’s buying program began, their stocks exploded, he adds.
“If you take China out of the picture, ending stocks on the global scene look pretty consistent, in that 50 million-bale range, or 50 percent of total ending stocks.”
Global stocks have been growing, but for the most part, production and use are hand-in-hand, says Riley.
“Typically, we’re using as much as we produce, but for the past couple of years we’ve been at about 10 million fewer bales than production. For the most part, we’re using all that we produce, but we’ve also got these huge stocks that we must deal with,” he says.
December cotton futures are better than where they were a year ago, notes Riley, but other commodities prices were skyrocketing while cotton prices declined. Cotton production was not nearly as impacted by drought last year compared to other crops, he says.
“Cotton prices, for the most part, were tracking up at the first of the year even as the dollar was strengthening. It was all because of China. During this time period, China was encouraging its mills to import cotton. They had a lot of cotton to get rid of, and they were trying to decrease their stocks.
“They told their mills they could buy three bales on the world market, but only if you buy three from our warehouse. They took advantage of that, and even as we had a strengthening U.S. dollar, cotton prices were increasing because China was encouraging imports into their country. It didn’t work because they still had to pay for a tremendous amount of cotton.”
Moving into the summer, the dollar weakened and cotton prices strengthened, and that relationship has held intact pretty well, says Riley. Along about the middle of summer, growers started seeing about a five to six-cent discount for next year’s crop.
Nothing operates in vacuum
“Nothing operates in a vacuum. Cotton acres will depend on what corn, soybeans, peanuts and rice do. Producers are pretty savvy, and they can see handwriting on the wall and know what to plant. Prices have been pretty range-bound for this entire year. We’ve pretty much stayed in that 80 to 90-cent range, outside of those days when prices jumped above 90 cents. Barring China doing something, it’s hard for me to see cotton prices moving out of that range.”
Nationwide, average cotton yields this year are ranging from 700 to 1,000 pounds per acre, says Riley. “For 2012, abandoned acres were higher in Texas than average, and it’s even worse in 2013. If you take out these states where a lot of acres were abandoned – like in Texas and Oklahoma – the maximum abandoned acres are at about 6 percent.”
U.S. cotton production dropped in 2008 and 2009 in terms of acres but picked back up when growers started hearing about $2 cotton in the winter and early spring, says Riley. Then, acreage slowly drifted back down, with 2013 acreage being lower than the previous couple of years.
“We decreased our acres in 2008 and 2009 because we had a huge buildup in our carryover, so pressure was put on prices. We were able to get that carryover down to a more manageable carryover.”
As for fiber consumption, cotton is holding its own, he says. “It slipped a little in 2008 and 2009, but we’ve slowly regained our share of fiber consumption. Other fiber content has made slight gains in the past two years, but in the big picture, total fiber consumption is holding its own in terms of the market share, and that’s a silver lining.”
Turning to export use and mill use, mill use has remained in the 3.5 million-bale range, says Riley. “If there’s less being produced, then there’s less to export. So the drop-off in exports shouldn’t be a huge concern, but domestic mills continue to hang in there and use their usual 3 to 3.5 million bales per year.”
From a balance sheet standpoint last year, there were 17.3 million bales of production, 16.5 million of total use, ending stocks of 3.9 million bales, and a stocks-to-use of 23.6 percent, he says.
“This year, there’s a projected production of 12.9 million bales and use in the 3.5 million-bale range.
Ending stocks number down
Obviously, exports will drop off just because there’s not enough to go around. We’re getting the ending stocks number down by about 1 million bales, and that gives us a much friendlier number for our stocks-to-use ratio. Not as friendly as we’d like to see it, but definitely better than it was in 2007 and 2008. We have seen prices in the 70 to 80-cent range as that stocks-to-use number has improved.”
World cotton production has fallen in the past couple of years, says Riley. “Producers throughout the world cut back in 2008 and 2009 just as we did in the United States, and now production has picked back up from a global standpoint. But it has slowly declined in recent years. Mill use, for the most part, has hung in there.
“If you think back to the high inventory numbers, cotton prices were under pressure, and it was time to buy. Even as we’ve come up in price, we’re still seeing an increase in global mill use. That has everything to do with an improving U.S. and global economy. Cotton demand has been picking up here in the U.S. and elsewhere, as well.”
Globally, production was at 120 million bales in 2012 and is projected at 117 million bales in 2013, he says. Mill use has been about 12 to 15 million bales less than global production in the past couple of years, so not surprisingly, ending stocks are growing.