Is there any hope for higher cotton prices in 2020 or will cotton producers continue to be faced with the prospects of growing the crop with the least attractive returns of any in the Mid-South?
Knowing what he knows now, the odds of the latter are much higher than those for cotton rebounding from its current market doldrums, according to Joe Nicosia, head of the cotton and merchandising platforms at Louis Dreyfus Commodities.
“When you put them in a chart that compares variable returns in dollars per acre, cotton is dead last,” said Nicosia, giving his annual presentation on the cotton outlook at the Friday Ag Update Session for the Mid-South Farm and Gin Show in Memphis, Tenn.
Whether that becomes the final word on cotton depends on a long list of possibilities, including how soon the coronavirus will be brought under control and if China announces major purchases of U.S. cotton under the Phase I trade agreement.
At current prices peanuts offer the highest variable return (cash revenue minus variable costs) of $341 an acre, followed by corn at $232, soybeans at $208, wheat at $154 an acre and cotton at $148 an acre for Mid-South growers.
“A lot of people will say that cotton makes more money even though it costs more money to produce, but it’s not making more money,” said Nicosia. “When you look at cotton’s percent returns on variable costs, it’s far worse.” (That’s 23 percent for cotton compared to 96 percent for soybeans.)
Cost per bale
Nicosia recently asked a group of growers what it costs them to grow a bale of cotton — not per acre, but per bale. The answers came back at from $280 to $340 a bale.
“Think about that,” he said. “If you plant cotton at 62 cents per pound, which is $310 per (500-pound) bale, you really haven’t made anything. But some of you would say prices might go up, so we need to plant it.
“If you think prices might go up, just go buy a call option at 4 cents in the futures market. You can own a bale of cotton for $20 — you don’t have to invest $330. You can buy your production for $20 a bale, and, if the prices go up, you’ll make that amount of money. And you can plant beans and make more money on them.”
Nicosia said he doesn’t like giving growers that advice, “because I make my living buying and selling what you produce. But I’m telling you what I think, and the good news is the PLC and ARC payments (Agricultural Risk Coverage or Price Loss Coverage Programs) are decoupled, so you’re going to get those anyway.
“If the prices are telling you you shouldn’t grow it, maybe you should listen to what the market is telling you.”
Race to 130
In the past, Nicosia has spoken about “The Race to 130,” that is the 130 million bales of consumption or production the world cotton industry will reach at some point in the future.
“We need to get consumption to 130 million bales first, and, if we do, we will pull prices up to the 80-cent average to ensure adequate supplies of cotton,” he said. “If production reaches 130 million bales before consumption does, prices will move toward 60 cents per pound to discourage production.”
What else could move prices higher? There’s no shortage of possibilities that could result in cotton prices trading back in the 80-cent range.
Nicosia displayed a slide filled with foreign newspaper headlines warning of outbreaks of locusts in some key cotton-growing regions of the world, including parts of Pakistan and India, in 2020.
“This is not your average grasshopper,” said Nicosia, referring to a photo of the locusts. “I don’t know where the outbreaks will actually occur; I just know I don’t want to be there when it happens.
“Traditionally, the locusts come out of East Africa and migrate across the Middle East, looking for water and food,” he noted. “Sometimes they die out. But look at the area in red on the right side of the map in Pakistan and India. That is the danger zone. India is the No. 1 cotton producing country and Pakistan is No. 5.
“I don’t know what will happen this time, but we need to be watching this closely because of the impact it could have on the world markets.”
One of the biggest questions is when will the coronavirus be brought under control. “I don’t have any more insights than you guys do, so I can’t help you there.”
Another question: Will China announce major purchases of U.S. cotton and when?
“I do expect them to follow through on the Phase One Trade Agreement,” he said. “China has more to lose by not following through on the agreement than they do by going ahead and following it.
“Yes, they have to get the port situation figured out with coronavirus so they can handle the imports. They might be pushed back a little bit in time, but my personal point of view is they will make it happen.”
Other questions Nicosia thinks need to be answered:
• Will India’s Minimum Support Price or MSP keep their exports non-competitive? “The longer India wants to waste its money the better for you guys.”
• Will China rebuild its stocks this year? With imports? Nicosia’s answer to both questions is yes.
• Will Australia receive enough rainfall to rebuild irrigation supplies for their 2020-21 crop? “They’re getting rain, so we could anticipate a fairly sizable increase in the size of the Australian crop this year.”
• Will the pink bollworm, whiteflies and locusts be an issue in Pakistan and India? “That’s real,” he said. “Pakistan has a problem, and if they can’t control these pests they may be in trouble.”
• Will soil moisture supplies be adequate for planting in Texas? “That’s much harder to predict,” he noted.