Survival Mode

A two-and-a-half hour drive south on U.S. Highway 61 from Memphis to the tiny town of Inverness, MS, will give a motorist a pretty good idea of where the cotton industry is moving in the Mississippi Delta. Much like growers across the Mid-South who have taken advantage of high grain prices to diversify over the past two years, Mississippi’s farmers have produced a landscape full of corn, soybeans and rice.

Of the National Cotton Council’s seven segments of the American cotton industry, the ginners have without a doubt been hit hardest by the drop in acreage. For Inverness-based Duncan Gin, that drastic drop in acreage over the past two years is causing some difficult challenges, as well as some resilient responses.

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“We went from (ginning) 46,000 bales in 2006, to 14,000 bales in 2007, and we’re going to go to 4,000, give or take, for the 2008 crop,” says Bill Kennedy, Duncan Gin’s president.

After seeing his gin’s production drop a staggering 90% over the past two years, Kennedy, who has been with Duncan Gin since 1972, isn’t particularly optimistic about cotton’s presence in their region in 2009, either. “Part of what we were doing in 2008 was just trying to hold on because we thought ’09 had some potential. I can’t say that I feel that way today,” Kennedy says.

There was a feeling of optimism early on for Mid-South ginners who figured the drastic drop in acreage in the region in 2007 would drive up demand and prices for 2008. That scenario did not play out. “What that tells me short term is that the world doesn’t care whether we plant any cotton or not,” Kennedy says. “Maybe the carryover stocks were just so high that it’s taking longer and longer to work them down to where the market will value it.”

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Those carryover numbers have indeed begun to shift to the bullish side of the ledger, according to the most recent USDA forecasts. If, as projected, the U.S. harvests a 14-million bale crop this season, and if use totals 19 million bales, then a year from now, U.S. stocks will have fallen from just under 10 million bales to about 5 million.

Staying Afloat

For the time being, though, Kennedy and Duncan Gin plan on rolling with the punches, as best they know how.

As with any business going through lean times, the initial step is to cut costs. Kennedy says that the company has had to reluctantly downsize its year-round employee base. Partially through attrition, Duncan Gin has downsized its work force from 75-100 employees throughout a normal year, to starting with around 20 this gin season.

The challenge, according to Kennedy, is keeping the core base of employees occupied year-round during these lean seasons. In part to alleviate that problem, Duncan Gin went into the business of selling planting seed in the early 1950’s. Of course, that venture was mutually beneficial for the gin and its clients. Better seeds for the growers meant more cotton for the gin. In that vein, Duncan Gin eventually began selling fertilizer in the early 70s, chemicals in the early 80s, and irrigation products in the 90s. Those side ventures, especially those that aren’t cotton restricted, are proving valuable during this period of low cotton acreage. Still, Kennedy insists the company’s diversification into agriculture retail is beneficial on several levels.

“Even in the good years, (selling the ag products) lets you be more efficient because you had (employees) on payroll and you just moved them from one spot to the next,” Kennedy says.

Cottonseed Value

The silver lining for the ginning business over the past two seasons has been the rise in cottonseed values. Since December of 2005, cottonseed’s market value has risen exponentially. As the world looked for new sources of natural oil and feed products, cottonseed filled a gap in the market. The beneficiaries, of course, were growers and ginners, to whom economic relief couldn’t have come at a better time.

“Today we’re looking at ginning 10% of what we were doing two years ago, which isn’t a lot, but it’s better than zero percent,” says Kennedy. “Those are huge issues. Its only 10%, but with today’s cottonseed prices, that 10% gives you an opportunity to pay the bills. We truly think that we can make money ginning a small crop by selling the seed for what the prices are today.”

Kennedy can’t help but be genuinely concerned about the amount of cotton that will be planted in his corner of the Mississippi Delta in 2009. With alternative crop prices hovering over cotton, and the adaptable nature of the Delta’s rich soil, he isn’t the only ginner in the area worried.

The reality is that cotton values do have time to recover before the start of the next planting season. That fact is not lost on Kennedy, who can only deal with the current situation during cotton’s lean years in the Delta region. For now, his business will continue to reduce production costs where it can and make the most of its chemical, fertilizer, seed and irrigation ventures.

And he says he won’t trouble himself with predicting what the market will do based on national and international events, choosing instead to focus on the present. “I personally don’t spend a whole lot of time following that because there’s not a thing in the world I can do about it,” Kennedy explains. “The bottom line to me is what that screen out there says the cotton market’s doing.”

The question then becomes what that screen has to project for Kennedy’s growers to begin moving cotton back into their fields. Many merchants and economists say the magic number is 85 cents. To date, both the December of 2009 and 2010 contracts on the New York Cotton Exchange have exceeded $1.00, but have fallen back. Leading cotton experts attribute that rise in projected value to increased world consumption and a leveling off of grain prices. In addition, China will be forced to devote more acreage to food production in the face of a growing population, and India is moving towards a more insular cotton economy. All of these signs bode well for American cotton, though it’s hard to blame Kennedy for his “believe-it-when-I-see-it” mindset.

If acreage decreases as much as Kennedy believes it might in the next growing season, Kennedy reasons gin consolidation could become a reality.

The cotton that was planted in the area in 2008 can be partly attributed to the region’s loyalty to the crop. Kennedy thinks: “Of the producers we’ve got, a big part of their mental game is ‘cotton has paid for most of what we have for the past 50 years.’ That’s certainly in the back of people’s minds.”

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