Lower Demand, Lower Imputs

Conveniently hosted in early January, the Beltwide Cotton Conferences takes place just as growers nation wide are deciding what to do with their acreage for the coming year. Accordingly, most Beltwide participants had cotton prices fresh on their minds as they took in the sights and sounds in San Antonio this year.

Those who were able to attend Dr. Gary Adams’s Cotton Economic Update presentation during the weekend’s opening session came away with a much better understanding of the crop’s looming struggles and opportunities during the upcoming year. Adams, the National Cotton Council’s Vice President of Economics and Policy Analysis, gave the audience a realistic view of the hardships the crop had overcome over the course of the previous year.

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“This past year’s market will not soon be forgotten by the cotton industry. Uncertainty and volatility have been the rule, rather than the exception,” Adams said. Detailing cotton’s uphill struggles with demand, input costs and export markets, Adams kept the downward trends in perspective. In terms of cotton’s worldwide demand, for instance, the short term outlook is bearish, although a change in fortune is quite possible over the next year, according to Adams.

In addition to demand, Adams sited the fluctuations in fuel prices and general global economic volatility as major factors in the value of cotton.

“For 2009, a big question will be the extent to which these problems linger and the potential for recovery,” Adams said.

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Slow Demand

Because of restricted credit availability and job losses worldwide, consumers have been hesitant with their purchases. This has been most evident in mill use worldwide, as the latest USDA numbers have lowered mill use to 166.6 million bales – down from 123.4 million bales in 2007. Adams noted that China, which accounts for around 40% of the world’s mill usage, is projected to decrease mill use for the first time in a decade. In the US, where imported textile products supply more than 90% of the demand, 2008 imports ran below year-earlier levels.

As demand grows smaller, Adams suggested that competition from manmade fibers should be monitored. Polyester continues to be a strong competitor with cotton, though the situation varies by country.

“In China, internal policies and import controls have generally supported cotton prices at 120% to 130% of polyester prices. In recent weeks, a sharp decline in polyester prices has pushed the ratio above 160%,” Adams said. Prices can fluctuate similarly in other textile based countries like India and Pakistan.

Adams was quick to note that though demand is currently suffering, these circumstances are not isolated. While USDA estimates translate into a 5.5% decline in mill use form the 2007 level, there have been four previous years with declines greater than 2% of the previous year.

“While this estimated decline is unmatched in recent memory, it is important to note that recoveries in demand have generally been fairly quick and robust,” Adams said. Of course, developing a market for U.S. cotton overseas is highly important to increasing the demand of the domestic crop.

U.S. textile mills are expected to account for only 30% of the U.S. crop, with the remaining 70% finding a home in export markets. According to Adams, the top three destinations for American cotton in recent years have been China, Mexico and Turkey.

Input Relief

Adams’ most immediately relevant comments involved the price of inputs over the coming year. The 2008 crop was the most expensive to produce in history, with the price of crude oil rising to $140 a barrel during production, which in turn drove retail gasoline and diesel prices over $4 per gallon.

Calling the recent drop in energy prices “one of the few bright spots” of the recent months, Adams noted that the Department of Energy projects oil prices to stay near current levels for 2009. The same projections show retail diesel prices in the range of $2.50 per gallon for the year. Natural gas prices also weakened in the second of 2008, and are projected to hover around $6 per cubic feet in 2009.

A drop in natural gas prices will also affect the price on nitrogen since it is one of the main ingredients in the formulation of ammonium nitrate, the main building block of all nitrogen fertilizers.

While translating input prices into a “per-acre number” is difficult because of variations in soils, production practices and management decisions, growers should see a decline in input costs on the whole in 2009.

“For this year’s crop, current prices should provide some relief in costs. While costs may not drop back to the 2006 level, a number in the range of 2007 or slightly lower seems very plausible.”

Adams noted oil prices have a large scale effect on our acreage numbers, as well.

“The impact of lower oil prices extends beyond the price of inputs,” Adams says. “The renewable fuels mandate has created a more direct linkage between oil prices and corn prices. If current oil prices persist, as the Energy Department projections suggest, then grain prices will remain under pressure as well.”

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