After a dozen years of building up surpluses by buying bargain-basement cotton contracts and jacking up its own domestic production, China is the 20-ton dragon in charge of cotton prices today.
"China is the anchor of the cotton market today, and what China decides to do over the next few months will determine the fate of cotton prices in the U.S. and worldwide," says Joe Nicosia, executive vice president of Louis Dreyfus Commodities, Cordova, Tenn. A decision by China to license more imports could make a 20-cent hike in lint prices, or a decision not to buy could lead to prices in the 60s, he told his audience at the 58th annual Beltwide Cotton Conferences in San Antonio Tuesday.
Nicosia explains China is sitting on roughly 10 years' worth of its current annual domestic shortfall in cotton production after buying and storing cotton over the past 10 years. In all, he says, China's stockpile represents $10.2 billion in market distorting "investment" which has allowed the nation to corner the cotton market worldwide. That "investment" was made with artificially-set internal prices for cotton that have consistently been higher than world lint prices. "China is, indeed, in control of what happens with prices," he explained, noting the nation is only 4 million bales per year short of being self-sufficient in lint production.
Nicosia says if you ignore the 80 million bales of cotton sitting in storage in China, (which you can't) overall supply and demand figures for world cotton call for about 60 cents per pound, yet prices in the U.S remain about 70 cents. As prices fall, China has been there to buy the bargain, and as prices rise they stop buying – in essence, using their "hidden" supply to control the market, he explains.
Nicosia says after destroying the textile industries of Europe, the U.S., and South America over the past 20 years, China has positioned itself as the world's largest user of textile fibers, both natural and synthetic, and as such pretty much controls not only prices of the fibers but of the blends being used in textiles through their influence on prices.
Since polyesters are 50% less expensive than cotton, China's internal market has begun favoring synthetic spun textiles and because of that, the overall demand for cotton in China itself has fallen, the trader explained. And, he says, until China begins using more cotton the world market will continue being dependent upon the whims of the Chinese government and its controlled economy.
Noting "it's always darkest before dawn," Nicosia says he sees the potential for the situation to correct itself somewhat in the next two crop years as Europe and the U.S. both slowly recover from the recession.
"I'd suggest growers price their lint on futures market rallies to add a few cents when and where they can to their ledgers, and to keep their options open on production decisions as much as possible until the 2013/14 crop year," he said. "A lot can change very quickly, and that will be the case in the cotton market in the foreseeable future."