The Rising Tide of Global Agriculture

Opportunities for American cotton will grow.

by WILLIAM B. DUNAVANT, III
President & CEO Dunavant Enterprises

The world of cotton has seen tremendous change and consolidation over the last 30 years in both production and consumption. Now we are facing an even greater challenge. Population growth is forcing macro shifts in food and energy consumption and production, threatening the loss of cotton acreage for the future.

India has experienced an astounding increase of 501 million people, for a growth of 77.5%. China is up 365 million, or 38%. The U.S., Indonesia, Brazil, Bangladesh and Pakistan have each experienced increase of 80-90 million people.

In 1978, the top seven cotton-producing countries made up 70% of global production. In 2008/09, this will be 84%. As for consumption, the top seven cotton-consuming countries made up 51% of global consumption, versus 83% in 2008/09. So in 2008, 83%-84% of all the world’s production and consumption has been consolidated into just seven countries.

In China and India, their huge GDP growth the last five years is doing more than creating wealth and opportunities. What we clearly see is changing dietary patterns, and the population explosion is having a dramatic impact on food production.

The wealth creation is also fueling a huge retail spending surge in India and China – these people are excited to show, or wear, their new-found wealth.

And clearly, the surging demand for oil is also a very important factor in the entire growth scenario.

China: Food or Fiber?
The Chinese government’s strategic planers are going to have to ask themselves if cotton production is more important than food production. I believe that in the next 10 years, China will lose 15%-20% of its arable farm land, at the rate of 1.5%-2% annually, to population growth and industrial development. If that is to be made up, it must come through increased yield or new production acreage. I do not believe either of these will occur to an extent sufficient to offset the significant acreage loss in cotton production.

Based on population numbers, China will have to dramatically increase food production.

The eastern half of China has a population of 1.2 billion people, or 90% of the entire country. That area currently accounts for 65% of total production. If I am correct, then China’s need to import cotton will grow by a staggering amount over the next 10 years. The shift will come for two reasons: Farmers will be told to shift acreage, or the new market economy will send the signal demanding the switch.

India: More Becomes Less
India has more land for production, more room for yield improvement and more need for improved farming practices.

India is now the world’s second largest cotton exporter, but that position will fade over time. India’s cotton consumption will grow over the next 10 years, and much of what is being exported now will be consumed at home, due to a retail sales explosion based on wealth creation.

World Uncertainty
Will the rest of the cotton-exporting world continue to grow cotton over the next 10 years?

• Uzbekistan and Central Asian cotton production will increase slightly. Cotton is still an important source of hard currency in that part of the world. The Central Asian countries will have a potential logistical advantage if the rail infrastructure to western China improves.
  
  
• Australia’s production will continue to be very dependent upon water supply and will flex to grain if the market gives the signal.
  
  
• East Africa looks to expand because the cost of production is cheap, but growth will be slow.
  
  
• West Africa’s potential for growth will be limited because its production cost is financed in euros. Today we see yield being affected from lack of inputs, which is cost driven. Political turmoil could affect production in some of the region’s countries.
  
  
• Pakistan will still be a net importer, but will remain a huge question mark geopolitically.
  
  
• Turkey will continue the need to import.

Mechanization, Technology
Where I see sustained growth is in the most mechanized, most technically advanced, highest yielding, and most progressive of agribusiness environments: the United States and South America.

Both will play off of each other year round, with the northern and southern hemispheres providing supply and timing advantages.

But Brazil faces supply chain questions, and improvements in its weak logistics infrastructure is years away in terms of efficiency and capacity to move a surge in agricultural exports.

The U.S. supply chain for export is changing, with more competition for cotton from other goods. The system in the Delta and Southeast was designed to deliver cotton for domestic use, not export. This creates a complete lack of systems and infrastructure to support just-in-time warehouse delivery for the export market.

If the U.S. and Brazil can address the supply chain problems, cotton from these areas will have increasing advantages over other world growths, and provide great opportunities for their producers.

Battling for Acreage
Over the past five years, as we all know, the grain price increases are truly astounding. Soybeans are up 139%, corn up 153%, wheat up 215% and rice up 201%. Cotton lags – up “only” 39%. So are we are going to say the world’s cotton producers will stick with cotton? We cannot eat cotton.

Agricultural prices are rising to record levels and the battle for acres is real. Record oil prices only complicate matters by causing dramatic supply chain increases and capacity issues as freight carriers shift to the more profitable lanes in the world.

For the first time in my career, I can say that I am bullish on the opportunities for world production agriculture. Operating risk is something all businesses have to address – the more opportunities to diversify your business risk, the better. For the first time in many years, farmers have multiple choices of crops that can be grown profitably and hedged many years forward.

The exciting part of this whole evolution in global agriculture is being created by market forces, not government subsidies. I would qualify that, of course, by saying we do have an energy subsidy on corn.

This may sound a bit crazy coming from a cotton trader, but I do not care what the world’s farmers plant, so long as they make money, retire debt and become more viable agribusinesses. Why? Because the market will give the signal to the farmer to plant cotton, and we will be right here to trade it.

I think we are in the most interesting times of my life in agriculture and I am just happy to be bullish on global producers. They deserve the opportunities.