This fall, the U.S. cotton crop might be like the pretty girl in a small town — all dressed up with nowhere to go.
The crop is estimated to be moving toward 19 million bales or higher at the halfway point of the season and finding a home for it at reasonable prices will be a huge challenge at harvest, given the strong dollar and the state of U.S. textile mills.
Joe Nicosia, CEO of Allenberg Cotton Co. Nicosia shared his views on where the U.S. and world cotton crops are headed during the Cotton Market Roundtable, a live Web event, held recently at the New York Board of Trade.
“We believe we're going to end this current year with a carryout of about 5.6 million bales,” Nicosia said. “Our current crop production forecast is for about 19.3 million bales. It's only July 13, so the real determination of the ultimate crop size lies ahead of us.”
The 19.3 million bales includes just under 2 million acres of abandonment in Texas and Oklahoma, which is more than offset by large acreage and yield potential in both the Delta and Southeast.
Crop may grow
“There's plenty of opportunity for this crop to not only shrink but to grow,” Nicosia said. “If we use trend yields for the U.S. crop, even removing the 2 million acres in the Southwest, you get a crop that's slightly over 20 million bales.”
Nicosia sees a mixed outlook on usage. “From the end of the 1997/1998 crop year, daily consumption in the United States by mills is down over 30 percent. To put that into perspective, had we been able to maintain the previous level of consumption in the United States, our carryout would have been about 2 million bales and our prices would have been about 20 cents higher. So you can see what a dramatic impact the loss of U.S. consumption has had on prices and the demand for U.S. cotton here at home.”
Nicosia pegs domestic consumption this year at slightly over 8 million bales, vs. 11-12 million bales in 1998.
“The wild card will be the export number,” he said. “U.S. cotton is in the enviable position of being one of the most reliable, affordable and consistent cottons in the world. That makes it sought after.”
On the other hand, the export future is only as bright as the health of the textile industry around the world. “And textiles around the world are hurting. It's not only the United States. Mexico is also having a textile recession.”
Because of that, “I can't get anywhere near the government's export number of 9 million bales. I believe we should be going with an 8-million-bale number, or less.
A carry-in of 5.6 million bales plus a 19.3-million bale U.S. crop would create a total supply of 24.9 million bales. Domestic use of 8.5 million bales and 8 million bales of exports disappear 16.5 million bales and provide a carryout of 8.4 million bales. (vs. the government's estimate of 7.3 million bales).
“Needless to say, 8.4 million bales is a lot of cotton. It's really quite burdensome and it's going to be quite negative for prices.”
Nicosia sees substantial production increases in the United States, India, West Africa and China. “Along those same lines, we're going to see relatively equal to slightly larger crops in all the other major cotton-producing countries. India and China alone are going to account for an increase of 3.5 million bales over last year.”
Nicosia forecasts world production well in excess of 96 million bales vs. the government number of 94.6 million bales.
Nicosia's forecast is an increase of 9 million bales from the year before. He sees world consumption close to 91 million bales, under USDA's projection of 92.7 million bales. That's a surplus of a little over 5 million bales in the world and a carryout of nearly 43 million bales.
The big world and U.S. crops aren't encouraging, but Nicosia believes the real problem for U.S. growers is the high value of the dollar.
“While the U.S. producer faces extremely low prices, producers in other countries have seen cotton prices at record levels in their own currencies. This is why foreign production is not reduced much. The high dollar is also hurting the U.S. textile industry. It's allowing for increased imports of cotton goods, which will deflate demand for U.S. cotton as well.”
With the production surpluses in the United States and the world, “the job of the market is to try and reduce planted acreage,” Nicosia said. “Cotton prices are going to keep falling until we do that.”
Three things could cut cotton acreage in the world, according to Nicosia — a weakening of the U.S. dollar, the removal or reduction of government support of agriculture or a dramatic rise in an alternative agricultural crop that can pull acreage away.”
Nicosia advised growers to “make sure that you run every bale that you have through the loan or POP the cotton if you're prepared to sell it.
“I would not have unrealistic expectations about equity values this year. In the past, we've see equities rise later in the year, but those years were also characterized by smaller carry-outs than we're going to be seeing this year.”
The Cotton Market Roundtable is sponsored by the Ag Market Network, the New York Board of Trade and Farm Press Publications. A recording of the event is available on-line at www.nybot.com.