* Hoarding distorting prices, says Louis Dreyfus chief
* Prices should be around 50 cents based on real
* Switch to synthetics a major headwind
By Josephine Mason
SAN ANTONIO, Texas Jan 8 The cotton chief of
global trader Louis Dreyfus Commodities took aim at
the largest buyer of raw cotton on Tuesday, blaming China's
aggressive stockpiling program for hampering the fragile
industry's recovery and distorting global prices.
Joe Nicosia, head of the world's biggest cotton merchant,
told hundreds of U.S. growers at the Cotton Beltwide conference
that enduser demand would not rebound unless prices fell to make
it competitive with polyester. That will only happen when
Beijing stops soaking up the world's surplus fiber.
"The longer China holds on to its policy, the worse and more
dire the situation will become," said Nicosia, executive vice
president and global head of cotton at the commodity trader.
His comments reflected widespread concern among U.S.
merchants, farmers and mills about the impact of Beijing's
hoarding, which effectively keeps half the world's inventory off
the market, as the industry struggles to repair damage from the
wild prices of the past four years.
After a two-year buying spree as part of a government-backed
program to support its farmers by paying premium prices for home
grown fiber, Beijing's strategic reserve will have accumulated
an estimated 40 million bales of cotton by the end of March.
Paying bumper prices, almost double the U.S. futures prices,
has encouraged China's farmers to grow more, but has also eroded
demand as its mills have switched to cheaper synthetic fibers.
The stockpile has also starved China's mills of a ready supply
of domestic raw material.
While Beijing is preparing to deal with the problem by
selling some stock and issuing fresh import licences for its
mills, it is unlikely to remove the overhang any time soon.
Nicosia said it could take until 2014 or 2015 before the
surplus was eroded and market returned to balance.
"There's no danger China will dump it on the marketplace,
but it will hold it for a while and it will be a wet blanket
over the market for quite a while," Nicosia said.
It is unclear how the government will offload the stockpile.
Some say the authorities may use it to supply China's mills if
it makes a push to cut cotton output and boost agricultural
output as part of efforts to feed its growing urban population.
But current futures prices suggest it would be a loss-making
venture for the world's second-largest economy. Beijing would
lose some $10 billion if it sold stocks based on the most-active
March futures contract, Nicosia said. March settled at
75.12 cents per lb on Tuesday, up from 75.71 a day earlier.
While farmers agreed the policy has probably distorted the
recent market outlook, other factors have contributed.
The steady decline in market share to synthetics started in
2008 after a price spike and before Beijing entered the fray.
A subsequent surge, over the course of a year, took prices
to record highs of $2.20 per lb in March 2011 and sped the loss
of market share.
To be sure, China's voracious appetite for cotton was one of
the reasons for the rise, but investors were also worried about
supply tightness after a devastating drought wiped out crops in
Texas, the United States' biggest growing state.
Even as mill use plunged in the second half of 2011, farmers
grew more more cotton to take advantage of the soaring prices.
SOAKING UP THE SURPLUS
With the market now facing a record surplus of just under 80
million bales in the 2012/13 season and consumption down a fifth
from its 2005/06 peak at 123 million bales due to those events,
Nicosia believes prices should be in the 50 cents range.
But futures prices are propped up at levels he considered
unjustified because half the world's inventory was held in
Beijing and the state reserve typically stepped in to snap up
fiber for its stockpile as soon as prices gravitate towards 70
cents, he said.
That price is considered cheap by the state because it is
almost half it pays its farmers for their crops. As their
interest sends prices towards 80 cents, they then back off.
"As long as China is soaking up supply, we'll be prone to
oversupply and unable to find a balance," he said.
While 70 cents is well off the record, it is well above
historic averages. Futures have not traded below much below 70
cents for more than a few days since November 2009.
The other headwind for the market is the meteoric rise in
the use of polyester, which is cheaper than cotton and less
volatile in price.
"It doesn't need rain. It doesn't need sunshine. It doesn't
need to worry about weeds," Nicosia said, highlighting the
reasons for the manmade fiber's popularity over cotton.
China's capacity to produce manmade fiber has surged to 12
million tonnes from 1.1 million in 1995. That is equivalent to
60 million bales of cotton, about half of global consumption
"The world needs Chinese demand. We have to get it back," he