2010: Year of the Rebound?
August 24, 2009 Two words: Acreage. Exports. The state of the United States cotton industry has to begin with the lowest acreage in decades and shrinking exports.
The United States Department of Agriculture (USDA) said in its final report for 2009 that acreage will drop to 9.05 million ― the lowest since 1983. Since 2005, the U.S. has lost 40% of its acreage. The states of Mississippi and Louisiana, where cotton has been king since before the American Civil War, will plant the lowest acreage on record.
Compounding that, exports and carryover figures from USDA have been far too optimistic at the beginnings of the past three crop years from what became reality at the ends. In each of those three years, projected exports were about 3 million bales higher than actual; actual carryover nearly doubled projected.
What has kept American cotton growers in the business during these incredibly difficult times has been the percentage of grower ownership of nearly all of its infrastructure and high-dollar investments in cotton-specific equipment.
The U.S. is the global leader in bringing new cotton technologies to the market that have improved yield and fiber quality. For instance, the state of Texas, which has over 50% of the country’s acreage, has seen its yield increase from 430 pounds per acre in 2000 to 827 pounds in 2007. Also, that area now produces some of the finest quality Upland cotton in the world.
And cotton has a “heritage” in America. Many growers who have drastically cut back on cotton acreage to plant higher-priced grains still consider themselves “cotton farmers.” But at some point, profitability has to return or infrastructure will be abandoned, equipment will become obsolete and it will become difficult for a “cotton farmer” to be one when he doesn’t plant cotton at all.
When is Next Year?
The American cotton industry has been saying “next year cotton will come back” for the past three years, and this time it may be right.
This spring, the USDA Foreign Agricultural Service’s Attaché Report projected that the economy in China is rebounding from recession faster than the rest of the world and its mill demand could result in the doubling of imports from 1.6 million metric tons (7.4 million 480-pound bales) to 3.0 million metric tons.
The report also projected that the U.S. stands to capture 51% of those imports. As China goes, so goes U.S. cotton. The U.S. is the global leader in cotton exports and nearly one-third goes to China, while China ships back slightly over 25% of the U.S.’s cotton-product purchases.
But many in the American trade consider the Attaché Report overly optimistic, although they do agree that the numbers are turning bullish. A large part of the optimism is driven by lower acreage that has reduced mill stocks to extremely low levels. If demand returns to pre-recession levels, some believe that there will be at least a 6-million-bale shortfall this marketing year.
As Cotton International Magazine goes to press, the ICE December 2010 contract was near 71.00, up 17 cents from the contract low of less than 54 cents in early March.
Cotton’s main competitors for acreage in the U.S., soybeans and corn, have been trending downward. In early June, the Chicago Board of Trade November 2010 soybean contract was above $10.20 per bushel and the December 2010 corn contract was at $4.70 per bushel. Again at press time, they were just over $9 and just under $4 respectively.
Growers in the U.S. Cotton Belt have the flexibility to make crop-mix decisions right up to planting time and the obvious question will be at what prices will cotton and grains have to be for cotton to be more profitable. As one trader recently put it: “I think the American cotton business in 2010 will be as sweet as it’s ever been.”
Contract Security
The U.S.’s sanctity-of-contract is never in question ― a fact not lost on global textile mills, especially during the market gyrations that started in March of 2008.
In 2008, some mills found themselves in the precarious position of having bought cotton at a high price then having to sell textiles into a depressed market. The result was that some mills defaulted on contracts with merchants.
“Sanctity-of-contract means a lot,” says John Dunavant of Dunavant Enterprises in Memphis, who is also president of the American Cotton Shippers Association. “There have been tremendous challenges from last year to this year with high-price contracts. There have been numerous mills put on the ICA default list and that has sent up a red flag to our customers that if they don’t fulfill the terms of the contracts, they go on the default list. Shippers who are members of ICA will not sell to them.”
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