Cotton Market Outlook Anthony Tancredi CEO Allenberg Cotton Co. / Senior Global Platform Head Louis Dreyfus Commodities
ONE THING IS CERTAIN: There is too much cotton!
NEARBY ICE FUTURES 100 95 90 85 80 75 70 65 60 55 50 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15
WORLD TRADE IN COTTON MLN 480 S 48 46 44 42 40 38 36 34 32 30 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Source: USDA
CHINA IMPORTS 30 25 20 15 10 5 0 11/12 12/13 13/14 14/15 15/16
ENDING STOCKS - WORLD OUTSIDE CHINA MLN 480 S 60 50 40 30 20 10 0
Is the cotton industry in its sunset?
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 % World Market Share of Cotton in Textile Fiber Use 75 70 65 60 55 50 45 40 35 30 25 Source: ICAC World Textile Demand, May 2015
Latest News Headline: If your clothes aren t already made out of plastic, they will be. Quartz Online News
Quote from the news article: Because [polyester is] inexpensive, easy to blend with other materials, remarkably improved in its look and feel, and no worse for the environment than conventionally grown cotton, it has allowed us to keep churning out more and more cheap clothes without a hiccup. Quartz Online News
OTHER RECENT HEADLINES Synthetic fibers surpass cotton to dominate U.S. apparel imports Cotton falls to five-year low on China import quota worries American affair with cotton frays as man-made fibers take to catwalk Global cellulose fiber market to grow at 9.75% annually 2014-2018 Cotton farmers hit by falling prices, rising input costs and China s import squeeze Cotton s Great Unraveling Athleisure wear: Goodbye blue jeans, hello yoga pants Recycled polyester market eyes buoyant 2015 The new trend of used clothes
WHY COTTON IS LOSING THE BATTLE WITH SYNTHETICS Polyester Yesterday Polyester Today
30 35 40 45 50 55 60 65 70 Jan-89 Sep-89 May-90 Jan-91 Sep-91 May-92 Jan-93 Sep-93 May-94 Jan-95 Sep-95 May-96 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 percent Cotton MMF USA Apparel Market Share by Fiber
USA IMPORTS OF APPAREL FROM CHINA % CHANGE FROM PREVIOUS YEAR Aug-Apr 12/13 13/14 14/15 Cotton 0.0 0.4-1.8 Manmade Fiber 1.4 10.7 10.9 Source: OTEXA
USA TEXTILE AND APPAREL IMPORTS % PRIMARILY COTTON 60 58 56 54 52 50 48 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 YTD Source: OTEXA
US cents/lb 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 China Cotton and Polyester Prices Cotton Polyester
CHINA (+HK) TEXTILE MILL DEMAND MMT 1980 1990 2000 2010 2020 Cotton 3.4 4.4 5.1 10.2 7.3 Share 76% 62% 35% 26% 14% Polyester 0.4 1.5 6.3 22.5 34.9 Share 10% 21% 44% 58% 67% All MMF 1 2.6 8.9 28.1 44.4 Share 22% 36% 62% 73% 85% Final Consumer Demand ICAC: Review of World Situation, July August 2014
Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 cents per lb 230 NEARBY ICE FUTURES 210 190 170 150 130 110 90 70 50 30
Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 cents per lb 230 NEARBY ICE FUTURES 210 190 170 150 130 110 90 70 50 30
Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 cents per lb 230 NEARBY ICE FUTURES 210 190 170 150 130 110 90 70 50 30
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Kilograms World Fiber Consumption Per Capita 14 12 10 8 6 4 2 0 Cotton Non-cotton Source: ICAC World Textile Demand, May 2015
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Millions 7500 World Population 7000 6500 6000 5500 5000 4500 4000 3500 3000 2500 Source: ICAC World Textile Demand, May 2015
World Population Growth Rates 2014 1.06% 2013 1.08% 2012 1.10% 2011 1.12% 2010 1.13%
WORLD COTTON CONSUMPTION MLN 480 S 12/13 13/14 14/15 15/16 % Change China 36.0 34.5 35.0 36.0 +3% India 21.8 23.4 24.5 25.8 +5% Pakistan 10.8 10.4 10.8 11.1 +3% Bangladesh 3.9 4.2 4.5 4.7 +4% Indonesia 3.1 3.1 3.3 3.4 +3% Vietnam 2.3 3.2 3.9 4.1 +5% Thailand 1.5 1.6 1.5 1.5 +0% Turkey 6.1 6.3 6.2 6.3 +2% Brazil 4.1 4.2 3.9 4.0 +3% USA 3.5 3.6 3.8 3.8 +0% +1% +2% +3% World 107.7 109.1 111.5 115.3 +3%? Source: USDA
WORLD COTTON BALANCE SHEET CONSUMPTION GROWTH AT POPULATION GROWTH RATE 12/13 13/14 14/15 15/16 Begin Stocks 73.7 90.5 102.4 110.3 Production 123.6 120.4 119.3 111.3 Imports 46.5 40.1 33.7 33.7 Consumption 107.7 109.1 111.5 115.3 Consumption 107.7 109.1 110.2 111.4 Source: USDA
WORLD COTTON BALANCE SHEET MLN 480 S 12/13 13/14 14/15 15/16 Begin Stocks 73.7 90.5 102.4 110.3 111.6 Production 123.6 120.4 119.3 111.3 Imports 46.5 40.1 33.7 33.7 Consumption 107.7 109.1 111.5 110.2 115.3 111.4 Exports 46.4 40.0 33.8 33.7 Loss -0.8-0.5-0.1 0.0 End Stocks 90.5 102.4 110.3 111.6 106.3 111.5 Source: USDA
FREE STOCKS OF COTTON 000 480 S World Ending Stocks Estimated China Reserve Stocks Free Stocks Average Cotton Futures cents/lb 11/12 73.7 19.0 54.7 91 12/13 90.5 32.5 58.0 79 13/14 102.4 51.9 50.5 84 14/15 110.3 111.6 50.4 59.9 61.2 63 15/16 106.3 111.5 49.0 57.3 62.5? Source: USDA, Allenberg Cotton Co.
CHINA COTTON BALANCE SHEET MLN 480 LB BALES 10/11 11/12 12/13 13/14 14/15 15/16 Begin Stocks 14.2 10.6 31.1 50.4 62.7 65.3 Production 30.5 34.0 35.0 32.8 30.0 27.0 Imports 12.0 24.5 20.3 14.1 7.7 6.0 Total Supply 56.7 69.1 86.4 97.2 100.4 98.3 Consumption 46.0 38.0 36.0 34.5 35.0 36.0 Exports 0.1 0.1 0.1 0.0 0.0 0.1 Loss 0 0 0 0 0 0 End Stocks 10.6 31.1 50.4 62.7 65.3 62.3 Stocks/Use 0.23 0.82 1.40 1.82 1.81 1.73 Source: USDA
China State Reserve Problem Like me, cotton becomes dull as it ages The State Reserve is at decision time Sale or rotation? Cannot wait The longer the Reserve waits, the harder it will be Officials claim State Reserve level should be 4mmt (18 mln bales). Today it is 11mmt (50mln bales) China has already restricted imports
CHINA S STATE RESERVE STOPS BUYING MLN 480 S World Production World Consumption Surplus Reserve Purchases 11/12 127.5 104.0 23.5 14.7 12/13 123.6 107.8 15.8 29.6 13/14 120.4 109.1 11.3 29.5 14/15 119.4 111.3 8.1 0 Source: USDA, Louis Dreyfus Commodities
CCA MEETING IN NINGBO JUNE 11-12 2015 Reserve announcement coming within 10 days Two week adjustment period before implementation Intention is not to pressure the market A lot of talk about rotation Preliminary 4 yr old cotton swapped out? Still uncertain about best policy Expect additional changes
Eastern Producers Leaving Cotton NCP Cotton area fell 14% in 13/14, then another 19% this year Indications are for a decrease of 25 to 30% in 15/16 Yangtze River area lost 9%, 16%, and 26%, respectively Farmers want low maintenance grain crops and factory jobs Nearly 70% of China s cotton now comes from Xinjiang, a remote province in the far west
The Choice
Xinjiang: Cotton s Last Stand in China Since 1999 agricultural land use has been steadily expanding in Xinjiang Cotton is nearly 50% of the spring-sown area Jobs are more scarce in the interior and Xinjiang farmers have continued growing cotton The last 3 years the Reserve bought the crop at $1.20+ This year they did not buy and local prices fell to 85 Farmers were promised subsidy based a $1.20 target They have not received their subsidy yet.
RMB/mt LOCAL CHINA COTTON VS IMPORTS 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Imported Cotton Price Under 1% Tariff Dom 312B Price
Could China Solve Its Surplus? China is forecast to use 35.5 mln bales of cotton this year. Maybe. Production fell from 35 mln bales 3 years ago to just 30 mln bales this year Forecasts for next year are 24-28 mln bales. If an 11 mln bale deficit materializes, China s surplus could be manageable in 3 years
USA RETURNS OVER VARIABLE COSTS COTTON VS COMPETING CROPS - $/PLANTED ACRE DELTA Cotton Corn Beans 2013 262 302 247 2014 238 240 232 2015 141 142 152 S/E Cotton Corn Beans 2013 283 231 195 2014 223 213 188 2015 117 114 113 TEXAS Cotton Corn Sorghum 2013 214 254 66 2014 193 187 29 2015 93 98 41 Source: LD Commodities
USA RETURNS OVER VARIABLE COSTS COTTON VS COMPETING CROPS - $/PLANTED ACRE DELTA Cotton Corn Beans Peanuts 2013 262 302 247 182 2014 238 240 232 182 2015 141 142 152 245 S/E Cotton Corn Beans Peanuts 2013 283 231 195 158 2014 223 213 188 197 2015 117 114 113 234 TEXAS Cotton Corn Sorghum Peanuts 2013 214 254 66 46 2014 193 187 29 68 2015 93 98 41 148 Source: LD Commodities
USA RETURNS OVER VARIABLE COSTS RETURNS/VARIABLE COSTS DELTA Cotton Corn Beans Peanuts 2013 40% 80% 108% 27% 2014 36% 65% 102% 26% 2015 22% 41% 73% 39% S/E Cotton Corn Beans Peanuts 2013 48% 61% 100% 24% 2014 37% 57% 98% 29% 2015 21% 32% 62% 38% TEXAS Cotton Corn Sorghum Peanuts 2013 50% 59% 30% 6% 2014 45% 44% 13% 9% 2015 23% 26% 22% 22% Source: LD Commodities
0 2 4 6 8 10 12 14 16 18 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inches LUBBOCK, TEXAS JAN THROUGH MAY PRECIPITATION
USA COTTON BALANCE SHEET MLN 480 S 11/12 12/13 13/14 14/15 15/16 Beg Stocks 2.60 3.35 3.80 2.45 4.40 Production 15.57 17.31 12.91 16.32 14.50 Supply 18.19 20.67 16.72 18.78 18.91 Mill 3.30 3.50 3.55 3.65 3.80 Exports 11.71 13.03 10.53 10.70 10.70 Total Use 15.01 16.53 14.08 14.35 14.50 Unacc -.17.35 0.19 0.03 0.01 End Stocks 3.35 3.80 2.45 4.40 4.40 USDA
Season USA COTTON EXPORTS MLN 480 LB BALES Total USA Exports USA Exports to China USA Exports without China Brazil, India, Australia Exports 06/07 13.0 4.1 8.9 8.3 07/08 13.6 4.4 9.2 11.0 08/09 13.3 4.0 9.3 6.3 09/10 12.0 3.8 8.2 10.7 10/11 14.4 4.6 9.8 9.5 11/12 11.7 6.4 5.3 20.5 12/13 13.0 5.5 7.5 18.2 13/14 10.5 2.6 7.9 16.3 14/15 10.7 2.5 8.2 10.9 15/16 10.7 2.0 8.7 10.6 Source: USDA, Allenberg Cotton
USA COTTON BALANCE SHEET MLN 480 S 11/12 12/13 13/14 14/15 15/16 Beg Stocks 2.60 3.35 3.80 2.45 4.40 Production 15.57 17.31 12.91 16.32 14.50 Supply 18.19 20.67 16.72 18.78 18.91 Mill 3.30 3.50 3.55 3.65 3.80 Exports 11.71 13.03 10.53 10.70 10.20 Total Use 15.01 16.53 14.08 14.35 14.00 Unacc -.17.35 0.19 0.03 0.01 End Stocks 3.35 3.80 2.45 4.40 4.90 USDA
USA STOCKS/USE RATIO - CURRENT (USDA) Year Stocks /Use 2015 4900 0.35 2014 4400 0.31 2013 2450 0.17 2012 3800 0.23 2011 3350 0.22 2010 2600 0.14 2009 2947 0.19 2008 6337 x 0.38 x 2007 10051 x 0.55 x 2006 9479 x 0.53 x 2005 6069 x 0.26 2004 5495 x 0.26 2003 3450 0.17 2002 5385 x 0.28 2001 7448 x 0.40 x 2000 6000 x 0.38 x
INDIA 000 480 S 13/14 14/15 15/16 Begin Stocks 12050 11620 14320 Production 31000 30000 29500 Imports 680 1100 900 Total Supply 43730 42720 44720 Consumption 23350 24500 25750 Exports 9260 3900 5000 Loss -500 0 0 End Stocks 11620 14320 13970 Stocks/Use 0.36 0.50 0.45 USDA
CONCLUSION IS THERE ONE?
USA: GAINS FROM REDUCED INDIA SALES India cotton exports normally peak Dec Feb Past two years India shipped huge volumes during that time period, stifling USA sales Today India market uncertain over impact of MSP Claims to be raising MSP 2.5% for next year Roughly 170 pts Reduced offers for sale, less competitive price, fewer sales USA export sales benefit
COTTON EXPORTS: INDIA VS USA MLN 480 S 16 14 12 10 8 6 4 2 0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 US India Source: USDA
$USA STRENGTH COULD REDUCE EXPORTS: 103 98 93 88 83 78
RECURRING CHALLENGE: GLOBAL GOVERNMENT POLICY China USA India
GOVERNMENT SUPPORT LEVELS FOR COTTON /LB 140 120 100 80 60 40 20 0 China India US
IMPACT OF GOVERNMENT SUPPORT Price cannot properly adjust planted area or usage when government support exceeds market level Producers in China and India benefit Producers in Brazil and Pakistan too, but not as much Producers in USA not until market falls below 52c Current government involvement sidelines fundamental analysis Markets held hostage by actions of foreign governments
CONCLUSION: MMF DEBACLE Remember Cotton is the Enemy? Time for our industry to fight back MUST find a way to increase demand for cotton Study environmental impact of MMF vs Cotton Advertise positives about cotton: sustainability, natural fiber etc Work with Cotton Incorporated to make a more visible industry Highlight USA farmers and farm products Without a concerted and unified effort, MMF will continue to erode our business
CONCLUSION: CHINA Stockpile still huge, still most important issue in the market Policy is changing, nobody sure how or when Appears resolution is internally focused Reduced imports, reduced production Demand increase in China is not for certain Mills admit increasing MMF usage Mills spinning higher counts, using less cotton Mill demand versus reserve quality could lead to more imports Remember: for every reserve bale used and not replaced, a bale adds to the world free stocks
CONCLUSION: USA Planted area could be less than anticipated Delta simply planting more beans Texas rains prevented some planting Balance sheet not much different than last year Reduced China imports hurts USA exports India program allows USA more room to maneuver Texas could surprise in USA production level When crop is up and comfortable price will move to start increasing sales USA export sales pace determining factor in price levels
CONCLUSION: INDIA Government demonstrated willingness to be heavily involved Regardless, with low exports there is too much cotton Now government claims it will raise MSP 2.5% With forecast flat to lower market, India government will be back in business again India exports suffer [USDA says +1.1 mln over last year?] Less pressure on flat price More opportunity for USA Likely India changes policy or accepts losses next year and exports competitively
CONCLUSION: MESS WE CALL THE COTTON MARKET Fundamentals.remember those? They still matter 110 million bale end stocks = gigantic Similarity between last year and this year in early overall outlook Must look for the exceptions the changes that make outcomes different China & India government policy critical, both likely to act differently than last year at some point Watch what they do, not what they say
CONCLUSION: MESS WE CALL THE COTTON MARKET Global stocks > 110 mln bales should have dropped price to record lows Market unable to get price signals equal to stocks situation Price cannot correct without full weight of stocks Without lower price, consumption increases are unlikely Global cotton market must find way to increase cotton use As long as government policies control inventories, market signals will be muted and uncertain, price unwilling to fall Release of government stocks alters global balance sheet Trading will continue range-bound until supply/demand returns to the forefront of market analytics Reduced fundamental activity allows speculators more control
A NEW APPROACH TO USA COTTON? Unify the segments to approach industry problems No producer = no cotton No textile mills = no market Stronger connections in the value chain One segment s problems do impact all others Can t isolate ourselves in our comfort area
Cotton has survived difficult times in the past Keep your eyes and ears open Changes are coming, some fleeting & some permanent Know the difference!