Cotton Vs. Corn: Paradox Proves Logic

Thesis, antithesis, synthesis: The Hegelian dialectic triad.

Wilhelm F. Hegel was an 18th-century German philosopher who believed that all things logical begin with a thought (thesis), which is then challenged by an opposite thought (antithesis). The two antagonists feed off of each other to create a positive (synthesis). Through synthesis, both the thesis and antithesis are proven to be correct. Paradox proves logic, Hegel believed.

The process is progressive, with synthesis then becoming theory. And on and on — ad infinitum — the philosophy tells us.

Hegel’s association of ideas became known as “dialectical thinking,” and there are hundreds, maybe thousands, of explanations for what it is. The fact that makes dialectical thinking almost impossible to define is that it can only be seen in practice.

Can Hegel’s triad be applied to today’s cotton and grains markets? Absolutely. Can the triad’s synthesis be proven? Not yet. But two sides of the triangle — thesis and antithesis — are definitely in place.

For the Cotton Belt, the thesis is that what is good for grains — particularly corn — is bad for cotton. The antithesis, of course, is that it is not. The synthesis is that growers who switch to grains and increase acreage will make money through the incredible rise in prices. At the same time, cotton acreage will decline, world stocks follow suit and cotton prices rise.

Exclusive of Hegel’s rationale, the years in which cotton acreage is declining will be painful. But to put it into a sports metaphor: No pain, no gain.

The Triad In Practice?

If there is to be synthesis, it is to believe what two heavyweights in the cotton industry have to say.

• Billy Dunavant, chairman of the board and CEO of Memphis-based Dunavant Enterprises, the world’s largest privately owned cotton merchandising company, in an exclusive interview with Cotton Grower editors:

“As I look ahead, the best thing going for cotton is the price of competing agricultural products — corn, soybeans and wheat. Competing crops are home runs right now. (Growers) can make good money on corn at $3.50, and soybeans at $7. It will reduce cotton acres, but it gives cotton a chance to reduce its carryover, and maybe have prices right themselves. It’s going to take cotton acres (out of production); in the Mid-South in particular. Good can come out of it.

“I think you will see American cotton — maybe 18 months from now — be competitive again. Supply and demand numbers look more favorable 12 months out.”

• Anthony Tancredi, vice president, Allenberg Cotton Co., also based in Memphis, at a Monsanto/Stoneville Pedigreed Seed Co. meeting in late December:

“Grains are trying their best to squeeze out cotton acreage, and so far it is working.

“Nothing changes a bad situation like a bad situation. … If people look at how bad things are, and the market does its job, it should get some land out of cotton because we have proven that we do not need it. But there is enough underlying strength in the cotton market that it cannot be dismal forever.”

The Domino Theory

The explosion in the grain markets had to start somewhere, and the planets were perfectly aligned.

The dominoes began to fall in Australia, which is in what some have termed a 1,000-year drought. Australia is the world’s third largest wheat exporter. According to reports, Australia exported 25.1 million tons (metric) of wheat in 2005. In 2006, it is projected that the country will produce only 10 million tons. If the situation Down Under plays out as predicted, Australia will be a net importer of wheat, rather than a net exporter.

“Prices have taken off,” says Tancredi. “A lot of people were caught short and wheat prices exploded. All of a sudden people’s attention turned to grains.”

And attention turned to corn especially. During the time the Australian wheat crop was burning up, fuel prices reached record levels, with the price of regular gas exceeding $3 per gallon in many areas. That helped to create an almost unbelievable increase in domestic demand for ethanol and biodiesel. Bloomberg News says corn futures actually rose 31% during the 2006 harvest, a time when prices fundamentally retreat. This despite the third largest corn crop the U.S. has ever produced. The record crop in 2004 dropped corn prices from $3.40 per bushel in the spring of the year to $1.94 during harvest. For 2006, corn prices are up around 70% over 2005.

The Potash Institute reports that over the past four years, production of ethanol has doubled to more than 12 billion gallons per year. Production of biodiesel has risen to 1 billion gallons per year.

Then there are soybeans. The fundamentals for soybeans are not as bullish as those for corn, but in the Midwest, for just about every corn acre that is added, an acre of soybeans is subtracted. Soybean acreage will rise in the Mid-South at the expense of cotton and rice.

“Beans have made a decent recovery,” says Tancredi, “but everybody is talking about beans as a follower, not a leader.”

Facing Cotton’s Problems

“We were faced with droughts in Texas, Georgia and Alabama. Mississippi had some rain issues (in 2006),” Tancredi says. “In the face of all this, the U.S. harvested way more than was expected. We averaged 798 pounds-per-acre, the third highest yield in history. I’m not sure anybody in the marketplace expected 21.3 million bales.”

But that is what we got. Add that production to 6 million bales of carryover, and based on current demand, the world has too much cotton. And a figure of 6 million bales in stocks may be too low, Dunavant believes: “I will tell you … it’s going to be 7.5 million bales.” Tancredi put his carryover number at 6.5 million.

Back to the Australian drought, Dunavant Enterprises owns three gins that normally turn out over 300,000 bales per year. “We’ll be lucky to gin 80,000 bales,” Dunavant says. But with global production being what it is, the market has not reacted in the least to Australian difficulties.

Another problem is that USDA has the U.S. scheduled to export 16.2 million bales this marketing year, but Dunavant believes it’ll be closer to 13.5 million.

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