Captains of Cotton

Association Presidents Speak

Littleton B. Carothers, II
President Atlantic Cotton Association

Don’t let anyone tell you that the cotton business is boring.

U.S. cotton growers produced 22 million bales in 2004, then 23 million in 2005, 21 million in 2006, and even 19.7 million in 2007.

The 2007 crop that produced 19.7 million bales got off to a rocky start in the Southeast and the fireworks show began. Some of those “rocket’s red glare” and “bombs bursting in air” were drought, ethanol, corn, wheat, soybeans beans, peanuts, CRP, environmentalists, the Senate, the House, election-year politics, the CFTC, swaps, over-the-counters, derivatives, index funds, speculators of all definitions, and last, but not least, bankers.

While all this is going on, inputs and fuel prices are rising through the roof. What are we to do? U.S. cotton is in a fight. It is in a fight for dirt and it is in a fight for market share. Every segment of our industry is in the ring fighting for cotton. The cotton community is like that. When something needs to be done or fixed, we come together as one unit to take care of it. It makes you proud, doesn’t it?

The cotton community educated the Agriculture Committees of the House and the Senate about what would be needed in the new farm bill for cotton to remain competitive in a world market. We told the CFTC during the first week in March that our futures markets were broken and not functioning, and the CFTC responded. The American Cotton Shippers Association and its affiliates were the first to make the CFTC aware of what was happening in cotton.

We told Washington that the world needed food. Why are we using food to make fuel? Why are we pushing for more CRP and new conservation programs? We told the United States Trade Representatives (USTR) the truth about cotton so they could stand firm in WTO negotiations.

There is some good cotton news coming, but we have to be patient until it does. Cotton consumption is going to outpace cotton production, and that usually means a more stable price floor at a higher price.

Ernie Schroeder, Jr.
President Western Cotton Association

The cotton market has been a fight between prices based on traditional fundamentals and prices based on historical value. With a large carryover, it is difficult for mills to be concerned with the availability of cotton.

However, growers have chosen to plant alternative crops as cotton is less attractive to plant than almost every other agricultural product.

California highlights this fact more than any other state. Not only are cotton prices less than that of alternative crops, but there are many choices of crops. In addition, concern over the availability of water has caused many growers to choose not to plant cotton. Upland acres will fall by 95,000 acres to 100,000 – a drop of almost 50%. This is the smallest acreage in California since the 1930s. And for the first time in history, Arizona will plant more Upland than California; with a 30,000-acre decline to 140,000, Arizona is still down over 20%.

These declines will reduce the availability of the premium Upland cottons produced in the San Joaquin Valley. These cottons are not grown elsewhere in the world. For high strength, long staple cottons, demand could easily exceed the much reduced supply.

Pima production may be even more affected: With limited water, California Pima acreage will drop 30%. The 2007 crop was a record at 850,000 bales, but it has already been sold. Demand for fine counts remains very strong. However, the 2008 crop may not reach 550,000 bales. With foreign Extra Long Staple production also forecast to decline, prices may ration the demand for US Pima.

With the large reductions in the Far West, a major concern is the continued availability of infrastructure. Some gins are closing this season; a few farmers are liquidating some of their cotton machinery. The 2009 season could be significant in the long term prospects for Far-West cotton. Prices will have to provide adequate incentive for producers, or mills may not find the quality and quantity of premium Far-West cotton to which they have become attached.

Anthony Tancredi
President Texas Cotton Association

Almost 50% of the planted area for the nation’s cotton crop is expected to be in one state – Texas. There should be so much to talk about surrounding the fundamental ramifications of a good or bad crop on the High Plains, good or bad export demand for the higher quality cotton being produced in Texas, and good or bad longer term prices as cotton continues to compete against alternative crops. Instead, the cotton industry finds itself on the precipice of dysfunction, courtesy of the extreme movements in ICE futures caused by index fund and speculative activity.

The original purpose behind the creation of the futures markets was to aid in price discovery and risk management, providing a tool that the underlying trade could use to help ensure orderly commodity flow from crop year to crop year and to aid producers with their production decisions. This purpose has been shoved aside by big money flowing into commodity markets purely as a speculative investment. The cotton market was not designed to handle such an inflow of investment capital, and, as a result, reacted in a totally non-fundamental fashion. At a time when ending stocks were building toward record high levels, ICE prices screamed to the equivalent of over $1 per pound. Insanity? Yes. The market no longer traded the supply/demand of cotton, it traded the supply/demand of money.

Deferred pricing and longer term positions are too risky in the face of another potentially extreme margin requirement. Regular basis levels now factor in larger risk premiums, either because the buyer cannot afford the margin risk associated with a hedge or because the buyer has priced this risk into the purchase.

It is completely backwards to have the industry affected by speculative interests instead of the opposite. The cotton industry is united in its opinion that the futures market cannot continue to operate in its current condition. This unity must now translate into substantive changes by CFTC to regulate speculative influence, reporting requirements and speculative margins so the commodity itself can dictate value. There are rarely times that an entire industry should take an intransigent stance on an issue. This is one of those times. It could be life or death.

Buck Dunavant
President Southern Cotton Association

This past marketing year was definitely one that will go down in the record books for cotton historians.

Cotton futures traded from a low of 54.81 cents per pound on August 27, 2007 to a high of 92.86 on March 5 of this year. Also on March 5, synthetics hit an options high of 109.00. From that day on, cotton has not traded the same. The daily volumes have dropped considerably, and there seems to be a lack of interest by traditional commercials to use the IntercontinentalExchange (ICE) to hedge the new-crop cotton. Since cotton futures are only traded electronically now, the No. 2 contract has become a front month contract with very few players in the back months, making it hard to trade the distant months.

Last year, USDA said that there were about 2.75 million acres in the Mid-South, and this year, Dunavant Enterprises forecasts a drop of about 16.6% to 1.8 million. Cotton will continue to lose acreage to competing crops like $14 soybeans , $7 corn and $8 wheat, especially if farmers can set a new crop basis on these crops.

With the global economic crisis we are experiencing, merchants are beginning to see our export customers buying pattern change to a just-in-time basis. And with the price of crude oil trading over $138.00 a barrel to end the week of June 2, U.S. cotton is going to be very noncompetitive with other cotton countries, like India.

Logistics are becoming such a vital part of moving our cotton. Countries with cheaper freight cost to the Far East, India and Australia will gain a competitive advantage over the U.S.

But the cotton industry is undergoing major changes that will eventually provide great opportunities.