China is the biggest buyer of U.S. grown cotton and of long-term critical importance to our cotton industry is convincing the Chinese to use more cotton in their domestic production, and in the past few years they have gone the other way, using more polyester, says Joe Nicosia, global senior platform head for Louis Dreyfus Commodities.
Speaking at the recent Southern Cotton Growers and Southeastern Cotton Ginners annual meeting, Nicosia said a big part of the loss of cotton use in China comes from changes in the blend rates used by Chinese mills. A few years back Chinese blends were more typically in a 60:40 ratio of cotton to polyester. Today the ratio is moving toward 60:40 in favor of polyester.
The reason, Nicosia says, is primarily the price of raw materials. Chinese mills can buy all the cotton they want from a huge domestic reserve supply, but the cotton costs $1.20-$1.25 a pound. Polyester, by contrast, has remained remarkably stable at less than $1.00 per pound for the past several years.
“China is making more cotton products than ever before, but they are expected to use about 30 percent less cotton in their apparel production this year, compared to last year. All of the losses in cotton usage in China could be restored simply by winning the battle of blend — getting the ratio of cotton to polyester back to a 60:40 balance in favor of cotton,” Nicosia says.
“Even in the United States, where our domestic use of cotton is only about 3.5 million bales per year, we are losing the battle of the blend. The ratio here is expected to be about 50:50 for the upcoming year.
“To get cotton use up in China, U.S. growers must win the blend in China,” he says.
“What China makes, the market buys. The fashion industry might think they determine what fabrics are used, but for the masses of people worldwide, China drives that market,” Nicosia adds.
To stress his point, the cotton marketing expert notes China is by far the biggest user of polyester. “Ten years ago, the Chinese used less than 10 million tons of polyester. Last year they used 12 million tons and are expected to use 14-15 million tons next year — that’s roughly equal to 60 million pounds of cotton, Nicosia says.
Worldwide cotton demand problem
“Worldwide, we have a cotton demand problem, not a cotton production problem. For U.S. growers it’s critical to build world markets for cotton and for cotton to increase in use in mills, even in blends in mills around the world.”
“Last year the world used about 106 million bales of cotton. If we can get the cotton blend back up to the 60 percent range, world usage could easily go up to 120-122 million bales.
“Cotton usage is coming back in India, Pakistan and other large textile producing countries, because they are buying cotton at world market prices in the 70-80 cents a pound range. Unfortunately, India for example, has a textile industry only roughly 14 percent the size of China’s textile industry. So, winning the blend in China is necessary to significantly influence world cotton usage.”
Currently, China has in reserve approximately 45 million bales of cotton. They sell their cotton to domestic mills for $1.25 a pound. Chinese mills can import unlimited cotton from world sources, but they pay a 40 percent tariff on this cotton. When prices are in the 70-80 cents a pound range, it’s good business for Chinese mills to buy cotton from outside the country.
Once cotton prices get too low, Chinese mills will buy more foreign cotton, and the Chinese will not likely let that happen, because their surplus cotton is too valuable.
“While the big Chinese surplus may seem like a threat to U.S. cotton growers, and it is long-term, for the most part it’s a good thing and helps keep prices from going up very high or down very low, Nicosia says.
“In the long-run we will at some point have to pay-the-piper for an over-supply of world cotton.
“I don’t think it will be like running off the fiscal cliff that we hear so much about these days, rather, I think it will be more of a gradual pay back.”
Last year China imported 24.5 million bales and they needed about 4.5 million bales. Demand for cotton from China has sustained prices globally.
Had China only bought the amount of cotton they needed to run the country’s textile mills, the effect on U.S. cotton growers and growers around the world would have been catastrophic.
Chinese can manipulate prices
“If the Chinese want to manipulate world cotton prices they can do so, because they own more cotton than the world has in available free stocks.
“Driving the price of cotton down and putting growers around the world out of business would be totally counter-productive to China’s textile industry, and that’s not what they are going to do with this surplus,” Nicosia says.
Last year other countries exported about 13.2 million bales of cotton, down 4-5 million bales from the previous year.
Countries like Australia, Brazil and India compete with the U.S. for world markets. “If you could take China out of the equation, last year the world produced 21 million bales more cotton than we needed, pushing the world surplus to 82 million bales — by far a record. This year cotton producers worldwide are expected to grow another 14.5 million bales than the world needs.”
Last year China was projected to buy 14 million bales of cotton and they bought 24 million bales. This year China is expected to allow textile mills to buy foreign grown cotton — a good thing for U.S. growers, but not enough to offset the worldwide surplus of cotton.
“There is no way around it, the Chinese surplus of cotton, estimated to reach 48 million bales by March, is like an anchor around cotton growers necks. Despite the world surplus, it feels like supplies are tight,” Nicosia contends.
“In the U.S., cotton supplies feel tight because they are tight. Free stocks of cotton, which is the amount of cotton worldwide that any buyer can buy at any time, is down around 46 million bales. The problem is all those bales in China’s reserve system, in India’s market support program and the U.S. loan program,” he adds.
“Based on a world surplus of 82 million bales and growing, the price of cotton should be in the 60-65 cents a pound range. Based on global free stocks, the prices should be much higher, maybe closer to a dollar a pounds — that’s what we’ve seen in the past with stocks at this level.”
For U.S. cotton growers in 2013, Nicosia says growers in the Southeast for sure should reconsider cutting cotton acres.
“Based on our cost to return figures, cotton is still a better bet than corn or soybeans in the Southeast. In the Delta, maybe not so much, and in the Southwest it’s all dependent on availability and cost of water.
“Cotton growers should closely watch spikes in cotton prices based on fluctuations in free stock supplies — and there will likely be several of these before new cotton is available.
“Sell when these supplies dip and when prices spike upward. These price ups and downs won’t last long, so growers will need to pay close attention to market conditions to get the most value from their 2013 crop,” he says.