China’s new agricultural policy could finally start a process everyone knew was coming — the unloading of China’s huge stockpile of cotton. The impact on world cotton trade could come as early as 2014-15, according to Joe Nicosia, executive vice president, Louis Dreyfus Commodities.

Speaking at the Mid-South Farm and Gin Show, Nicosia said that China has “studied many of the U.S. government policies to help them decide what they want to do going forward. They seem to have settled on some form of target price or subsidy program going to their growers. This is going to be a big change. The policy is not finalized yet. We should expect to see more clarity in the months ahead.”

The policy would make China’s domestic cotton production available to China’s domestic mills, rather than stuck off the market in a reserve, as it has been for the last four years. “At first that would not be good for U.S. cotton exports, because China would import less cotton. But ultimately this is the beginning of the process of what has to happen to work through a 100-million-bale world carryover.”

Around 57 million bales of the world carryover are in China’s reserve program, and do not include cotton stored in the countryside or in textile mills.

 

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Nicosia says some lost export potential could be offset with higher consumption, starting with increasing the percentage of cotton in the cotton/polyester blend. The blend suffered as China’s textile’s mills increased the percentage of polyester to offset the high cost of its domestic cotton in the reserve. Nicosia estimates cotton loss at about 7 million bales of consumption annually.

To regain the higher blend percentage will depend largely on U.S. cotton price competitiveness with polyester.

But cotton customers have to respond as well, according to Nicosia. “The two most discernible consumers in the world are citizens of the United States and the European Union. We are the ones who are supposed to check the labels. We are the ones who are willing to pay for cotton. We are the ones who understand that polyester doesn’t breathe. In reality what we have found in the last four years, is that we buy what they make.”

The good news is that since 2011, cotton in the blend “is finally rising, and it’s rising higher than the trend line, at about 2.5 percent to 3 percent. But it’s going to take several years to recover.”

As a result of new ag policy, Nicosia estimates a decline in the Chinese cotton crop in 2014-15, to about 30.5 million bales. “With their consumption at 38 million bales, which is rising a little bit, the gap would be 7.5 million bales.”

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China’s imports could fall from an average of 16 million bales to around 7 million bales. “Currently USDA estimates that the world trade is going to drop from about 39 million bales to about 37 million bales in 2014-15. We estimate that could be as low as 33 million bales.”

Cotton profitability

Despite the uncertainty in the world, U.S. cotton profitability is looking better compared to corn, which had a bumper crop and record production in 2013, and is now dealing with significantly lower prices.

“Cottonseed revenues have been excellent, and when you add all of these other things to it, cotton actually pencils out to be the best crop to grow in the Delta, Texas and the Southeast.”

There is still bullishness in U.S. old crop fundamentals, Nicosia added. “USDA currently estimates the 2013-14 cotton crop with a carryout of 3 million bales. But we have three areas of doubt — crop size, our domestic use and exports.”

Nicosia noted that according to classing information from USDA’s Agricultural Marketing Service, “the 2013 crop looks like it’s going be about 300,000 bales short of previous estimates. That alone could cut our carryout to 2.7 million bales. We think domestic use is going up, and that could take us down to 2.6 million bales. Exports will be driven by U.S. price competitiveness and the amount of import quota issued by China.”

He estimates that ending stocks for 2013-14 could range between 1.5 million bales and 3.7 million bales. “The difference between 1.5 million bales and 3.7 million bales in carryout is about 25 cents a pound.”

With more trade competition, Nicosia said the United States has to be ready to ship cotton when called upon. “It’s crucial that the United States can ship its cotton when it’s needed and efficiently. China imported 2.8 million bales in December. We’re the largest exporter in the world, and we only got 300,000 bales of it. India alone took 1.6 million bales. If we had gotten an extra million, imagine what our carryout would be today and what our prices would be.”

Nicosia said the United States is helping its own cause somewhat with the recent resurgence in its domestic textile industry. “We think domestic consumption is going to move back toward 4 million bales within the next 12 to 18 months.”

Nicosia says sustaining new crop prices over 80 cents will be difficult unless China continues to hold cotton off the market, or there is a weather disaster in a major producing area.

Growers should be aware of the inverse between old crop and new crop futures. “It’s about 10 cents today. What inverses tell you is that cotton is worth less in the future. So be careful that you don’t hold any inventory this year through that inverse. That’s a surefire loss.”

 

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