# A View From the Top

Author: Jim.Robinson
Published: 2009-03-04
Canonical URL: https://www.cottongrower.com/cotton-news/a-view-from-the-top/

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The U.S. cotton market is facing serious challenges, from increasingly sophisticated global competition to the specter of a new Farm Bill later this year. The changes are creating reactions large and small throughout the industry, including within the walls of Dunavant Enterprises, one of U.S. cotton’s longest standing organizations.

In fact, the 70-year old Memphis-based company is one of the world’s largest privately owned cotton merchandising organizations, and handles more than 6 million bales of U.S. and foreign cotton per year. Given this long history in cotton, and a recent move by the organization to end its membership in the National Cotton Council, now seemed like the perfect time to pay a visit to the COB and former CEO William B. “Billy” Dunavant, Jr. to get some inside perspectives on this decision, as well as other current market forces driving the cotton industry going into 2007. Always a compelling and maverick personality on the cotton scene, Dunavant shared his thoughts in an exclusive interview with the editors of Cotton Grower and sister publication Cotton International.

On The Cotton Council Decision

On October 9, 2006, representatives of Dunavant Enterprises hand-delivered a three-page letter of resignation to the National Cotton Council, ending a 38-year membership run with an organization for which Dunavant himself served as president and chairman of the board in 1988.

“This was a big move for us,” says Dunavant. “We have been there 38 years and have gotten a lot of good from the Council. We tried to be a part of it, as good as anybody who has ever been a member. But we finally decided that we could go our own way much better with our own representative in Washington.”

In the letter, Dunavant outlined its reasons for leaving. “The National Cotton Council from its inception was created to represent the interests of all seven segments of the industry equally, as contemplated by its bylaws. As we look at all the dynamic changes in the industry, and particularly its growth into a global market, and the Council’s struggle to respond to these changes as a unified organization, it has become apparent that the Council no longer functions as it was first envisioned. We believe the structure of the Council is outdated in the current world cotton trading environment, and can no longer effectively represent all seven segments.”

The letter concluded: “We see an urgent need to change, as the pace of change is accelerating for our business and that of our customers; we do not believe the Council’s current operating structure is the most appropriate or effective vehicle to respond to this challenge. Dunavant Enterprises, Inc. has not wavered in its support of United States cotton and the United States cotton producers. We will continue this support in the ways we always have by promoting, selling and delivering the best fiber in the world — American cotton.”

While this ends one chapter in Dunavant’s involvement in the organization, the subject of membership in the future is not entirely closed. “I like the National Cotton Council and we are very friendly with the people in this organization” says Dunavant. “We would never say we would never come back and we told them that — and I think the door will always be open.”

Dunavant shared many interesting comments about a wide range of issues during the interview:

On The Farm Bill

“In a new Farm Bill, I would like to see something that gives American cotton producers protection along the lines of what we have now, with the exception of when it comes to payment distribution. I do not want the American cotton industry and American cotton producers to make more money when the price is low than when the price is high. And a number of times during this Farm Bill, that has happened. I have not been a big proponent of the (current) Farm Bill – and you know that – because it has a tendency to hold cotton off the market, rather than move cotton to the market.

“Throughout the years Dunavant Enterprises has made money off the Farm Bill, but we have made it off of storage in our warehouses, and that is not a way to do it. In my opinion economics and supply and demand must prevail.”

On Government Loan Programs

“We are going to produce about 21.35 million bales this year, and we believe that over 15 million bales will go into government loan. We do not have a good farm program if that much has to go into the loan. The only people who make money out of that are the warehousemen who store it and the ginners who are ginning it. But it’s hard for merchants to find a market for U.S. cotton when all the cotton is locked up in the loan. Too much of our cotton is tied up in the loan and in my history in the cotton business that is not the way you want to run your business. Going through the loan costs the government a lot of money, taxpayers a lot of money and the cotton will eventually get into the marketplace, but the price is way out of line. Because of that, other countries are taking our markets.

“At some point, U.S. cotton will come out of the loan. But right now, the U.S. futures market has 830,000 bales of certificated stock. That is cotton that has been redeemed from the farmer and taken to delivery points for the New York futures market. That number is a world record. Normal certificated stocks would be around 200,000 to 300,000 bales; the reason is that certificated stock has grown to be the best market for U.S. cotton. The current farm program makes this clearly wrong. Futures are supposed to be a discovery mechanism, not a delivery mechanism.”

On U.S. Cotton’s Global Competitiveness

“Most of the growths China is buying currently are not U.S. because we are not competitive. We sell cotton every day, but there’s no real volume. Right now U.S. cotton is the most expensive in the world; Chinese is the cheapest; then India and West African, and then you have the Uzbeks; all of these growths will have to be out of the pipeline before the U.S. becomes very competitive again.

“Consumption is going up every year, but U.S. cotton is now residual cotton — we are a residual supplier — because we lost Step 2. We will be taking carryover down, but that doesn’t mean we don’t have enough cotton. The carryover is too high. In the U.S., according to USDA, carryover is going to grow from 5.4 million bales to 6 million bales.

“I will tell you today that it’s going to be 7.5 million bales, because the U.S. crop is large – as USDA told us – but they have U.S. exports at 16.2 million bales. We think we are on target to ship 14 million bales and that’s a tremendous gap. We think starting in February business will pick up for U.S. cotton mainly because of China.”

On The Biggest Global Competitors

“I think China will be the dominant player, but yet India is coming on like gangbusters and Pakistan is right behind them in both producing and consuming. Smaller countries with cheap labor — Vietnam and Bangladesh — are growing, but they will always be behind China. All of these countries will be competitors of China as the years move on, but China will still stay ahead.

“India will be the one that you really have to grapple with. In fact, we are thinking of opening an office in India for Dunavant Enterprises. We have always had agents there, but we are talking about a full Dunavant operation. It is something that we have to consider because of the potential growth; they are a real growth component for the future. We have offices in China, and we think we need offices in other developing countries.

“I am told that China is buying a fair amount of that medium-count yarn from India and that will continue. It will be interesting to see how our Democratic Congress will deal with China in the next few years.

On Global Complaints Over U.S. Cotton Subsidies

“Probably some of them are legitimate, if you want to be realistic. I think the original complaint from Brazil, which we lost, was very justifiable. It’s all the direct result of the farm program; right or wrong – and we can agree or disagree – the farm program has not been to the benefit of foreign cotton producers. Step 2 made American cotton competitive every day, and we have had a quality product to merchandise. Step 2 was an asset, but Step 2 is gone and the quality is still there.

“We see the West Africans continuing to struggle and gripe about the U.S. (and our) unfair farm programs. Some of that is true, but a certain amount of it is inaccurate. A U.S. farm program, like we have had, is definitely not good for foreign cotton producers; for sure not good for the Brazilians.

“If you asked an American cotton producer, he would say no – what’s good for him is not bad for the rest of the world. Honestly, in my opinion, that is what he would say. But I don’t know that there is a happy medium. The American cotton producer wants everything for himself, but not the foreign cotton producer.”

On U.S. Cotton Quality

“One thing U.S. growers are doing that will make our cotton more competitive is that we have begun to produce outstanding quality. California and Arizona are producing quality that would rival Australia’s. The American producer has learned in other cotton producing areas to produce both yield and quality and have been for 4 years. “FiberMax came on the scene 4-5 years ago and really got it going. Now the Delta Pines and some the rest are thinking seriously about quality; FiberMax was the start of that.

“I don’t see a lot of room for us to improve quality. Every year it has continued to improve because of seed varieties that not only increase yields, but quality. Near term, and I am talking about 2-3 years, they’ve done about all they can to increase the quality of cotton.”

On The Rise of Alternative Crops

“As I look ahead, the best thing going for cotton is the price of competing agricultural products – corn, soybeans and wheat. That will reduce cotton acres — in the Mid-South, in particular. There will to be a lot of acreage diverted from cotton to corn and wheat, and secondarily to soybeans.

“A reduction in cotton acreage would serve to reduce carryover and cotton acreage will be down if competing crop prices stay where they are today. Our economists have not put a number on acreage yet.”