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Will red-hot prices freeze out demand in cotton?

Brent Murphree cotton-warehouse-1-brent.jpg
There is a real battle for acreage between all row crops, however Nicosia believes that the new cotton acreage is going to be larger than recent estimates.
With cotton prices trading close to 90 cents, demand may stall according to Joe Nicosia.

Current cotton prices have moved up and have the potential to freeze demand, says Joe Nicosia, head of the Cotton Platform for Louis Dreyfus Company, and executive vice president of Louis Dreyfus Company LLC. 

"They moved very quickly higher," said Nicosia during the Mid-South Farm and Gin Show Ag Update Meeting in Memphis Feb. 26

He noted that during the last week of February old crop prices had already taken away some of the U.S. demand. Cotton traded for a short time over 92 cents.

Current prices have dropped but are still within arm's reach of 90 cents, despite a large release of cotton into the export market by India.

In contrast as the pandemic hit in early 2020, cotton demand dropped and with it cotton prices. For a short time, cotton traded below 50 cents.  

As the economy began to recover following the initial hit from the outbreak of COVID-19, cotton prices began to trend upward, surpassing trading prices that began 2020 in the high 60s and peaking in the 70s before word of the pandemic began to spread.

World high levels

"You saw the giant drop again from the pandemic," said Nicosia. "But, as you can see it's back at world high levels, there is a rotation going on in the world. The world is changing."         

He pointed to the fact that consumption is moving outside of China and growing in Bangladesh, Pakistan, Vietnam, India and even Turkey. As a result, the world is not as dependent on China for trade.

The bales that used to go to China are finding homes in those countries with increased production.

"We think that this trend is going to continue," he said.  "The rest of world consumption outside of China is going to continue to grow.

"We think that it is going to continue to allow for good demand for what we would consider to be the exportable surplus countries of the world.”

According to Nicosia, short-term prices are going to follow the flow of speculative money.

"The best thing that I can tell you is that it looks like they're going to be hostage held to the amount of money flow in and out of the cotton market," he said.  "If the speculator wants to continue to add to his long position, prices are going to go up. If he wants to try to get out, they're going to go down.

"So in the short term, especially for old crop, I think that the prices are going to be following the money flow."

He noted that as the price for old crop cotton moved up, demand was frozen in the short term as India freed up over 12 million bales to move into the export market. After holding on to their stocks for some time, India is now selling off that cotton and taking market share from everyone.

"They [Indian bales] will find a home and work against the U.S. demand number that has already been substantially locked in," he said. "The cotton values in India are ultra-competitive."

Larger estimates

He said that the new crop is where the real excitement could happen.  There is a real battle for acreage between all row crops, however Nicosia believes that the new cotton acreage is going to be larger than recent estimates.

"A lot of that is due to the increase in prices. We are still going to need it," he said.  "The new crop carryout is going to be tighter next year than even this year. We believe that the demand for December and for next year is probably not going to be higher than the demand that we have currently in old crop."

He added the caveat that the carryout would be tighter for the new crop unless there is excellent weather in West Texas.

"I really don't see how new crop prices can be known very much until West Texas is assured of its planning moisture," he said. "If we go into West Texas and it's dry and we can't get that crop planted, I think prices explode.

"So if it doesn't rain in Texas and China steps in to fulfill its commitment to the Phase One deal, even if it's only equal towards slightly less than last year, it's still enough."

He said that there is potential for new crop prices to easily trade over a dollar.

"I anticipate high volatility in the year ahead," he said. "Traditionally, anytime that we are over 80 cents, we are in and unstable situation. We're going to continually see these kinds of days."

The day of his talk there was a 6-cent range in cotton prices. Because of that lack of stability, he recommends using options as part of a price protection plan.

"So please consider using options to help protect your risk, because you're going to need that," he said.

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