Over the past year or so the Chinese government has been building its internal cotton reserves to the tune of about 8 million bales currently in storage. The buying helps keep Chinese cotton producers on the land, and ultimately gives the nation a marketing hammer to use on world prices.
The reserve currently is bidding $1.27 a pound for lint, a situation that is holding prices steady and overall tradeable freestocks in the world tight. While that's good news for U.S. cotton producers in the short run, the downside comes from the fact that, while the Chinese are holding cotton off the market for now, they don't always have to do so.
Joe Nicosia, CEO of Allenberg Cotton, Memphis, Tenn., says we've seen the Chinese try to control the market before, and when they sold their stocks prices fell, but their hold wasn't as strong globally as they thought and they ended up with little cotton of their own.
"I don't think they're eager to do that again," the global cotton marketer told a packed house at the 60th annual Mid-South Farm and Gin Show in Memphis. But, he added, producers have to keep in mind that 8 million bales is sitting there, and will enter the market someday.
The Chinese connection will be very important to prices over the next 90 days, Nicosia explained, and unless there are clear signs of "buying" or "selling" in China, U.S. producers are faced with a big question mark as to planting decisions.
"I'd say if you have old crop cotton, market it on rallies. For the new crop, I don't know," he sighed. "So many things can happen.
"Last year we saw 4 million bales of West Texas cotton disappear due to the drought, and it's still dry in the High Plains right now. If timely moisture comes, we could see that 4 million bales return to boost supplies," he said. The trader notes the La Nina conditions are deteriorating in the Pacific which could restore rains to the U.S. Southwest and Southern Plains, but it would also be expected to reduce rains in Australia, so total impact of Texas coming back on line might be neutral to world supplies.
Another unknown for the coming marketing year is India's actions of building its own reserves as well as its emerging as an exporter of lint -- at lower prices than U.S. cotton. In fact, the U.S. and India represent 60% of the world's cotton production, and if India stops stockpiling cotton for its own mills, the combination of its exports and those of the U.S. could weigh heavily on prices.
Add those pressures to an apparent loss of demand through the past several recession years when polyester gained significant shares of the market in Chinese and Indian mills, and to the reduced buying power of consumers in the U.S. and Europe and you can see a case for falling cotton acreage this year, Nicosia explained.
"Things can happen so quickly, and there are so many variables, we can't really forecast a trend for cotton," he added. "I'd recommend looking at the information you have today and locking in something profitable at least for part of the crop, and look at buying calls to take advantage of any upside potentials of future surprises."