Permanent Replacement Crops Are Pima’s Greatest Threat
August 22, 2013 While high cotton prices that net a better-than-expected profit can be a nice windfall, short-term gains are less beneficial for everyone than long-term stability and steady growth, based on fundamentals like supply and demand.
It came as no surprise that world extra long staple (ELS) cotton supplies were going to be reduced for a second consecutive year, and when decreasing stocks are paired with surprisingly strong demand, it follows that U.S. pima prices have increased sooner and more rapidly than expected.
Through February, U.S. pima prices held fairly steady at $1.40 cost, insurance and freight (CIF) Far East for more than three months, providing both buyers and sellers a much-needed sense of stability that was good for all industry stakeholders.
However, once it became apparent that the three largest ELS producing countries in the world were all going to reduce planted acres again, the stage was set for a price run-up that has stretched into spring.
As the 2012 crop was being ginned, we watched the weekly export reports closely to see if U.S. pima sales could maintain an average of 60,000 bales sold per month, in order to reach the USDA’s forecast of 720,000 bales of export sales for the 2012/13 marketing year.
However, what we saw were monthly average export sales of 70,000 bales per month from August 2012 through February 2013. If maintained, this pace would lead to annual sales of 840,000 bales. Consequently, U.S. pima prices (delivered Far East) began their march from $1.40 to $1.59 by April.
In the first week of March, the price of Type 137, a Chinese ELS variety, jumped significantly. During that same week, about 65,000 bales of U.S. pima were sold to Chinese textile mills, a marked increase from February in which China mills purchased 30,541 bales of U.S. pima for the entire month.
It had become very clear to the Chinese mills that their demand for ELS cotton was far greater than their domestic ELS supply could meet and that they needed to look elsewhere for that cotton.
The current U.S. pima balance sheet suggests there are less than 200,000 bales unsold for this marketing year, a number that would not be considered historically low. But the recent price surge and flurry of export sales are not so much about current tight supplies as they are about how tight they are expected to be in the coming marketing year.
Permanent Crop Acreage Is Up 25%
The USDA’s initial prospective cotton plantings estimate, published March 28, placed new crop U.S. pima acreage at 206,000 acres, down 14% from 2012. However, because the entire draw-down on U.S. pima acres is in the higher-yielding state of California, the effect on actual production will be more significant than the acreage reduction. By applying a historical average yield of 1,380 pounds per acre, estimated 2013/14 U.S. pima production would fall below 600,000 bales, compared with estimated 2012/13 pima production of about 750,000 bales. Progress of U.S. pima planting is slightly ahead of schedule this year and should be complete by mid-April.
Total cotton acres in California, including pima, continue to be replaced by grains and vegetable crops, but more importantly by permanent crops such as almonds, pistachios and grape vines. Over the last six years, permanent crop acres have increased by nearly 25% in the San Joaquin Valley, where 90% of U.S. pima is grown.
Not only does this transition impact this year’s crop, but it will for years to come. With high establishment costs, an almond orchard can stay in production for 30 years, while there are some pistachio orchards that have been in production for over 100 years.
The Goal for ELS: Profit for All Players
As with the global upland cotton market, Chinese government policy is also impacting the global ELS cotton market. One such policy was the exclusion of its own long staple cotton in the Chinese government’s state reserve procurement plan. Therefore, it does not make economic sense to the Chinese farmer to grow ELS cotton when the yield is less than upland varieties and has a longer growing cycle.
Egyptian prices for Giza 86 and Giza 88 were a little behind the price levels of Chinese Type 137 and U.S. pima. The higher-quality Giza 88 was being traded at $1.52 delivered Far East, which usually commands a slight premium over U.S. pima. Part of cause for this inverse in pricing can be attributed to Chinese textile mills, which generally favor U.S. pima over Egyptian cotton.
In summary, prices are high now with the anticipation that the price could get higher. But as a pima grower, ginner, seller and shipper, we at J.G. Boswell prefer a stable market in which all parties can make a profit. We know from the 2010 and 2011 marketing seasons, when the U.S. pima price soared to over $3.00/lb., that when prices get too high, the ELS market will experience demand destruction and mills will switch to other cotton growths – or even man-made fibers.
GET THE NEWSLETTER TODAY!
