Paradigm Shift Changes Market For The U.S. Cotton Grower
Even during trying times and with challenges ahead, the United States cotton industry is well positioned to maintain its leadership in the global marketplace, according to incoming American Cotton Shippers Association President Adolph “Andy” Weil III. A fourth-generation cotton merchant and president of Weil Brothers Cotton, Inc., Weil learned the international cotton trade early on from his father and uncle. Weil began in the family business as a “squidge” (or apprentice) in the sample room and later moved up in the company, eventually traveling around the world to meet with clients overseas.
“As long as I can remember, I have understood that there was an international element to this business and remember that it always intrigued me,” Weil said. “I came into the family business and of course went through all of the steps of learning the trade. I began traveling and learning about things in the field, both from the grower perspective as well as the mill perspective. That was a great way of meeting people and beginning to network with people with whom we do business.”
His experiences taught him that the market is cyclical, but ups and downs can be weathered with good business planning and industry cooperation. Weil sees the need for cooperation even more in 2007 as the U.S. writes a new Farm Bill and fights WTO challenges in the future. The loss of Step 2 changed the American cotton industry and the merchandising segment in particular, with more than 80% of U.S. cotton now shipped overseas. Marketing channels for U.S. cotton are “empty” with more than half of the 2006/07 crop locked in the loan as the market has not been at levels to release this cotton. In other words, without Step 2, U.S. cotton has not been competitive, as farm subsidies provide a pricing floor that entice U.S. growers to grow for government programs rather than the market. Warehouses will feel the pressure as cotton that has waited in the loan program for overseas buyers will be coming out of the loan on top of the next crop, which could be another large one. As Congress writes the next Farm Bill, Weil believes that attention must be paid to market signals, allowing U.S. cotton to be competitive so that valuable market share is not lost.
While the U.S. cotton industry must be protected from and not dictated by WTO challenges, Weil believes the program should be more attuned to maintaining its share of world exports. Cotton is important not only from the export aspect, but also its multiplier effect on the U.S. economy, he added.
“The WTO has already fired a huge shot across the Farm Bill bow by forcing our hand and ending export subsidies and export programs as of July 31, 2006. With the loss of Step 2, we certainly have exposed weaknesses in the 2002 Farm Bill, and it has taken us out of a competitive element. It has not allowed cotton to go into marketing channels, and it’s really gotten us into the situation that we are finding ourselves in now,” Weil said. “But at the end of the day, Congress will write that Farm Bill, not the WTO, and that is something that needs to be made very, very clear. U.S. agriculture and cotton in particular certainly do not need to be sold out because of what the WTO deems. We need to write our own policy.”
Unified on All Fronts
Farm Bill legislation is not the only issue that needs a unified effort from the U.S. cotton industry, Weil said. To compete with other cotton producing countries, U.S. cotton will have to maintain and increase its quality while ensuring timely delivery. If merchants can market a quality product with on-time delivery, U.S. cotton will remain a highly valued commodity by international mills.
Cooperation along the production supply chain – from seed breeders, growers, ginners, warehousers and shippers – is the key to success in increasing the quality of U.S. cotton. Weil believes U.S. seed breeders have produced varieties with exceptional fiber characteristics, with the help of grower and industry input. But improvements must continue to keep up with demands from international mills.
“I think the American grower has done a phenomenal job in communicating to the seed breeders, or perhaps the industry as a whole has been communicating to seed breeders, what the market is demanding out of the fibers. And growers are much more sensitive to that,” Weil said. “The qualities have improved greatly and seed breeders have been staying on top of that and have afforded better yields for growers on top of better quality. So I think growers are doing a great job responding to what the market needs.”
While U.S. varieties meet international mill standards, Weil says U.S. cotton could be improved with fewer neps and less contamination. Harvesting and ginning technologies need to address these issues in the future, so that quality is maintained down the pipeline. “We probably need to be more sensitive to things that might detract from the quality such as neps and short fiber content that we often hear about on the merchant level when we deal with our customers in foreign markets. These textile mills invest a tremendous amount of money in spinning and weaving equipment, and the modern technology involved in those pieces of machinery demands a lot from the fiber to perform at peak efficiencies,” Weil said. “If we can’t provide that, either because of the ginning, the way it’s packaged or because of the foreign material in the fiber, the mills will complain very heavily. It can blow up a mill and hurt their efficiency.”
Mills not only need cleaner, contamination-free cotton, but they also need on-time delivery. In the past, U.S. cotton has been a reliable commodity in a marketplace where other suppliers didn’t have the infrastructure or ability to deliver shipments as timely. But the market has shifted. China leads the world in production, and India’s yields have reached record levels as its growers take advantage of technologies.
With these countries in close proximity to Asian mill markets, U.S. logistics must find less expensive, more efficient delivery channels to compete with overseas markets. One way to achieve this, Weil believes, is to move more cotton to the country’s ports, staging it for export shipments.
“The best way we can deal with congestion in the interior is to go ahead and just continually move it and stage it in ports around the country. I think we are fortunate to have as many ports as we do, so that it does spread the opportunity to ship cotton effectively. We have great facilities on the East and West coasts, as well as in the Gulf of Mexico, to facilitate timely shipments for exports,” Weil said. “I think the capacity is there to move the cotton, as fast as we can get ships and containers available to load the cotton. But I think the real sticking point is in the interior. Warehouses are rewarded when cotton is kept in the loan. But we need to be sure it can be moved in a timely and reliable manner. We all need to cooperate, or we need to force the issue.”
Two Sides to Every Coin
China and India may be the largest competitors of U.S. cotton, but there is another element to the supply-demand equation. The combined population of the two countries is more than 2 billion, or one-third of the total world population. As growing economies and a rising middle-class begin to expand the purchasing power of India and China, those countries will demand more textiles. Weil believes this demand could be very helpful to U.S. cotton, but we have to be in position to take advantage of it.
“We are seeing the two largest countries in terms of population increasing with growing middle classes, and they are realizing more disposable income, and they are becoming more discerning in what they are buying with their disposable incomes. Their budgets can afford more, and they want to get the best for it, and I think cotton is well positioned to take advantage of that,” Weil said. “So that is a great promise. With a global population that is growing very rapidly, we are now over 6 billion people, and the demand for cotton is going to continue to grow.”
The Challenge Ahead
If international demand will be the savior of U.S. cotton, it also is the market’s greatest hurdle – greater than writing a new Farm Bill, greater than growing a quality crop and greater than delivering bales on-time in a global market – to the U.S. and international cotton community. Supply can match demand in two ways: by increasing yields or increasing acreage. Technologies will continue to optimize yield, but probably not with the continued explosive degree of success as in the last 10 years. The only other solution is an increase in acreage; but with a burgeoning bio-fuels industry and growing global population, land – especially land for cotton – has become a dwindling commodity.
“You can shift land around, but there is so much more demand on that land. Grain for alternative fuels. Grain to provide feed for livestock to provide protein for the food chain. So there is going to be a real juggling of how we use land, and also more land is going to be expended for people to live as populations increase. You can build up, but you can only build up so far,” Weil said. “So there is quite a challenge out there. Will there be a demand for cotton in the future? Yes. Cotton is going to be relied on greatly as a fiber to clothe, and I think it is going to be promising on prices in the long run.”