The world needs a deficit in cotton production in 2013-14 to avoid building record stocks for a third straight year, says Allenberg Cotton Co., CEO Joe Nicosia.

Speaking at the Southern Cotton Ginners Association 2012 summer meeting in New Orleans, Nicosia said the cotton market is in “disequilibrium,” with world production having exceeded demand for two years in a row. The result – world ending stocks are expected to be around 72 million bales by the end of the 2012-13 marketing year, the highest ever.

“We have to get in sync between production and consumption,” Nicosia said. “We have gone through extreme and drastic disequilibrium, and it’s caused volatility in prices. In 2009, we had a huge production deficit. In 2011-12, it reversed itself. We’ve gone from extreme deficits to extreme surpluses in a very short period of time.”

A number of factors have contributed to the fundamental disparities including significant average cotton yield increases over the last decade or more and lost demand to man-made fibers, according to Nicosia.

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“We’ve seen a giant boom in average yields, 36 percent over the last 20 years. It was really led by India, although the United States has had big yield increases too. It allowed the production in the world to take a big leap forward.”

For a while, cotton consumption had been rising by an even greater amount. But as world economies have faltered over the last four years, the rate of consumption increase has fallen and is now only 24 percent over the 20 year time period. In real numbers, cotton consumption has dropped from a high of 120 million bales before economic troubles set in to just under 107 million bales recently.

High cotton prices have added to the declines because mills have lowered the percentage of cotton in their blends, Nicosia said. “Lost demand has been a big thorn in the cotton industry’s side recently. This pessimism in demand for cotton hasn’t stopped yet. Maybe we’re getting close. In July, we finally had an uptick in consumption.”

While dollars spent on apparel sales have gone up in recent months, “the number is very deceiving,” Nicosia said. “Cotton use has actually gone down 4 percent, while man-made fiber use is up two percent. This is one of the problems causing us to build stocks. Currently today, we are not optimistic that cotton is going to come back in and get its share back from polyester. From what we see around the world, the consumer may prefer cotton, but he’s not buying it. Therefore, it’s been much more difficult to get cotton blends back to where they were before.”

Two factors in cotton prices

Two factors keeping cotton prices relatively high in the meantime are Chinese government policies and the recent spike in corn and soybean prices.

Nicosia noted that China is building a huge reserve of cotton, and is paying its domestic producers $1.25 a pound. This reserve has effectively taken a lot of surplus off the market, to the point that it’s created an artificial tightness.

Nicosia says without the policy, “the United States today would already be in complete shambles, just like it was eight years ago. China is saving you every single day. And that’s not even their intent. Their intent is to save their farmer and their industry. But their policy has been carried out so poorly that they are actually your greatest savior today.”

In the past year, China has imported 23 million bales of cotton, and bought 15 million bales of its own cotton. China had hoped that by importing cotton for their reserves, they could take cotton off the market, force world prices much higher, then sell cotton at a lower price to their textile mills. But the policy isn’t working because the surplus in the rest of the world is too big.

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 “China is making policy that is hurting them,” Nicosia said. “They put the support price too high and they don’t know how to get rid of the (excess cotton).

While China’s policy did not succeed in pushing prices higher, it has help put in somewhat of a floor under prices. Without China buying our exports, Nicosia says, “our carryout would be at 6.5 million bales and you cotton would be going in the loan at sub-50 cents.”

Rising corn and soybean prices are also working to keep cotton prices high, Nicosia said.

Traditionally to escape a surplus situation, the market “drives cotton prices to 50 cents, takes people out of the industry, crushes farm income and gets people out of farming cotton. With corn and soybean prices at $8 and $16, cotton will lose acres, but we’re just redirecting our assets to other crops.”

A possible change in China’s leadership dynamics, which could happen this fall, could affect its reserve policy, according to Nicosia. “So far the cotton policy in China has been to support the grower with high cotton prices, and whatever is happening in the domestic textile industry is just a by-product. We think the new leadership may give more attention to the industry side of the equation. That should help increase consumption, possibly increase the blend levels and allow China to start eating into the reserve surplus.”

In the meantime, the world does not need more cotton, Nicosia said. “The key is that we have to produce a deficit in 2013-14. We cannot continue to add to the surpluses in the world. At some time, China is going to release that cotton into the world. If they sell their reserve when the world is in a surplus situation, our exports could go down to 8 million bales, maybe even smaller, and our carryout goes to 8.5 million. They would basically shift excess stocks from China to the rest of the world. If they release the stocks when the rest of the world is in deficit, it’s okay.”