Can world cotton producers do it again — find a way to satisfy another surge in world hunger for cotton? How this question is answered could determine how much time U.S. cotton farmers spend as grain producers, says a Memphis cotton merchant.

One clue comes from a supply-demand situation a few years ago that is similar to the one cotton producers face today, according to Joe Nicosia, chief executive officer, Allenberg Cotton Co., speaking a the Mid-South Farm and Gin Show.

World cotton demand was rising slowly until 2003, then took off, thanks in large part to WTO trade liberalization, Nicosia said of the nearly 13 million-bale increase in world consumption from 2003-04 to 2004-05.

“The projections were that the world would be deficit cotton and that cotton explode. Speculative firms got on board because they bought the long-term story that there's no way in the world we can take production high enough without having to buy millions of acres around the world.”

The world promptly grew an incredibly large crop of 120 million bales in 2004-05, a 20 percent increase over the year before, mostly from yield increases. “People usually talk about yield increases as between 1 percent and 5 percent. A 20 percent increase seems almost impossible. Imagine doing that in corn or beans.”

The speculative funds hung on, thinking the production was a one-year quirk, “but cotton prices couldn't rally because of the surplus.”

World production declined to 114 million bales the following year, then increased to 116 million bales the year after that, while consumption steadily increased. “Now we're almost back to the cusp of the same story again. Consumption has started to move (projected at 124.7 million bales in 2007-08), and the question is whether or not there will be yield increases. If not, we'll see some separation between consumption and production, and we'll start to draw down stocks around the world.”

Acreage estimates support the notion that production could likely fall this year. Nicosia believes that world cotton acreage will decline by about 2.3 million acres in 2007-08, including a 2.8 million-acre decline in the United States, where shifts to grains are occurring, and a half million acres in Brazil.

With a 53.7 million-bale carryover, a 117.5 million-bale world crop for 2007-08 and consumption of 124.7 million bales, “it looks like we have a drawdown of roughly 7.2 million bales. But we have to add back 2.7 million bales of unaccounted-for stocks, which puts our ending world stocks at 49.3 million bales.”

This unaccounted-for line on the ledger comes from China's enigmatic accounting methodology, said Nicosia. “We get yarn numbers, textile numbers and production numbers out of China. Every year, the figures say they'll be out of cotton by April. But every year, they end up with a surplus. We know that something is wrong in the statistics, either the consumption is not as big or production is much larger.”

Over the last five years, USDA has added 8 million bales into the balance sheet, “8 million bales that the United States, as residual supplier in the world, could have exported,” Nicosia said. “We could have gone from a 9.4 million-bale carryout to a 1.4 million-bale carryout. It would have made the long-term speculative story true and prices would be 98 cents instead of 58 cents.”

India is becoming a formidable competitor in cotton trade these days, thanks to its increased production and exportable supplies. With by far the largest cotton acreage in the world and the lowest yield in the world, at 400 pounds an acre, It still has the most to gain by new technology.

“They are fully introducing GMO seed and their yields are increasing rapidly. Next year, they will take over the United States in production, moving into the No. 2 spot behind China. They are the thorn in your side because they are the ones who've taken the Chinese demand from you.

“Last year, we shipped 9 million bales to China. So far this year, we've shipped 1 million bales. That should tell you the story right there. We still have five months to go. But we have a smaller share of a lesser number, which is why our exports are down such a large percentage. The market does expect that the Chinese market is going to take off as we head into the spring.”

Meanwhile U.S. cotton producers continue to deal with the loss of Step 2. With world demand continuing to rise, “the United States needs more market share, not just more bales. So it's not just that we need to go down in price to sell cotton. The key thing is that we need to go down relative to foreign cotton to get market share back.

“That's what Step 2 did. It allowed us, for any one day, to be relatively competitive without having to go down substantially to grab marketshare. That's why we used Step 2 so much and that's what the government didn't understand.”

Given this dilemma, some tweaking in farm programs might be needed, according to Nicosia. “If we can get some flexibility on our counter-cyclical payments, provide the grower with some downside protection, then lower loan rates and loan premiums, this will be a great advantage long-term for the industry.”