Joe Nicosia speaks at Beltwide
When it comes to cotton, China holds all the cards
One could argue that no U.S. agricultural product, and the fortunes of its producers, is more dependent on the whims of a foreign government than cotton. And Joe Nicosia, who heads the world’s largest cotton trading organization, gave U.S. producers a lot to lose sleep over this week in his keynote presentation at the 2013 Beltwide Cotton Conferences.
The root of the problem is China’s "market distorting policy," says Nicosia, who works for Louis Dreyfus Commodities. The Chinese government buys millions more bales of cotton than it needs every year, stores them in a reserve, and occasionally sells them back to Chinese textile mills at about $1.25 a pound, 50¢ above current market prices.
Why would it do this?
"Years ago," Nicosia told a rapt audience in San Antonio, "China decided it needed more food for its people and didn’t want to increase acreage for cotton." Keeping cotton prices artificially high encourages the production of polyester to supply the country’s hungry textile mills. China has gone from 1.1 million tons of polyester staple fiber capacity in 1995 to 14 million tons this year, the equivalent of 60 million bales of cotton a year.
Whose to say whether China's policy couldn't change overnight? Here are five "scary thoughts" Nicosia presented, nearly all of which have the potential to undermine the U.S. cotton market.
1. China has accounted for all of the worldwide increase in cotton consumption within the last decade.
From 2000 to 2010, world consumption of cotton grew by 28 million bales. But during that time frame, Chinese consumption increased by 29 million bales. That means that purchases made by the rest of the world contracted by 1 million bales. Last year, the U.S. exported 11.7 million bales of cotton and 6.4 million went to China.
"They are your largest customer and you are completely dependent upon them. If we can’t increase that consumption inside China, and get away from them becoming self-sufficient in cotton, you have no place to market your crop," Nicosia said.
"The entire world’s increase in consumption can be explained by what happens inside of China," he added, noting that world cotton consumption topped out 123 million bales a couple years ago. "Today we’re at 106 million. That’s 17 million bales of consumption that’s no longer taking place, and the reduction is all within China."
The industry's biggest challenge over the next 10 years is to grow foreign demand for its product, especially within China, the trader said, adding that lower prices would help in that regard.
2. China has enough cotton in its reserve that it doesn’t have to buy any more to supply domestic use for 10 years.