Cotton will be fine in ‘09’

For decades California’s San Joaquin Valley cotton has been like the mechanical hare in a greyhound dog race; every cotton region in the U.S. has chased the rabbit, but has never caught it.

However, over the past decade, the dogs have gotten faster and the rabbit has slowed a bit. Other growing regions of the U.S. have raised the quality bar with much improved cotton variety qualities tantalizingly close to envied “SJV” quality.

In fact, mills have found they can now buy base grade SJV quality from many other areas of the U.S.

Fortunately, the SJV Acala cotton industry has gotten back in front of the hounds and hare race; producing far superior quality Acala cottons than ever before over the past few years, commanding premiums as much as 15 cents per pound over other U.S. uplands, according to a longtime Bakersfield, Calif. cotton merchandising firm.

Unfortunately, SJV producers, ginners and marketers may find it difficult to keep their dog in the fight. California cotton acreage continues its free-fall. A decade ago there were more than 1 million acres of cotton grown in the state. In 2008, it may be only 200,000 acres (50,000 short staple; 150,000 Pima), which would be less than half the 450,000 grown this season.

This is a “worst case scenario,” says Earl Williams, crop estimator and president/CEO of the California Cotton Ginners and Growers Associations.

However, even his best-case scenario of 350,000 acres in 2008 (250,000 Pima; 100,000 Upland) is still 100,000 acres less than this season.

The difference between the best and worst hinges largely on water, although alternative crops like wheat, safflower and corn play into the equation, as well.

“You have to be realistic about 2008 with the water situation and more economically attractive crops. There is no getting around it,” said Williams.

“Next season will be a serious adjustment period, but my motto is cotton is going to shine in ’09,” said California cotton’s No. 1 cheerleader.

“I think economics will move back toward cotton in 2009. The bloom will be off wheat and corn in 2009. Hopefully, the water situation will be adjusted by then,” he added. “I think you will see a serious adjustment in the ethanol thing this season and that will affect corn prices. Land not planted to trees can go back to cotton.”

Cotton consumption worldwide continues to climb and production has been going the other way. When the two meet, there will be supply adjustments and cotton economics will improve, he said. “It will be cotton’s time in ’09.”

With a normal water year and 350,000 acres in 2008, Williams said California cotton acreage could bump up to 400,000 acres the following year. If it hits the worst-case scenario rock bottom in 2008, he predicts the bump up in 2009 will reach only 300,000.

“Unfortunately lot of people who get out of cotton will not go back,” he said.

SJV cotton is doing well in all areas, except price. The 2007 crop was as good as or better than the last good season in 2004. Average yields for Pima and Upland both were more than 1,300 pounds per acre. Quality is good, but a little less than the excellent quality 2006 crop.

“I talked to people who got 4-bale Upland and 3.5-bale Pima. People who took advantage of an excellent early planting window did well. Those who waited until the ‘normal’ planting time had a few stand problems from cold weather. Overall, though, most people are pleased with the crop,” he added.

Ernie Schroeder Jr., chief executive office of Jess Smith and Sons, Bakersfield, Calif. cotton merchant, and the company’s vice president/senior manager Kevin McDermott agree with Williams.

“The 2007 crop has been substantially better than the last two years. The majority of the people are happy with the crop,” Schroeder said.

“Picking and ginning started two weeks earlier than last year,” said McDermott.

“Yields are always the most important thing to producers and there has been anticipation of better prices for 2007, but we are not seeing that yet,” said Schroeder, ”However we expect improvement in the near future.”

Nevertheless, there is an upturn in the economic situation because SJV Acalas and the non-Acala “California uplands” are getting better premiums over base grade pricing than they have in years past.

For years non-Acala cotton bales carried a non-approved cotton tag by the San Joaquin Valley Cotton Board that set them apart from board sanction approved Acalas to protect the Acala market. “In the past these tags indicated to a mill manager that there was something wrong with the cotton.” said Schroeder “It could be a perfect bale of cotton and they’d still think something was wrong with the cotton because of the tags.”

The disappearance of those tags has improved prices, according to Schroeder.

However, the real story is the added money above the normal SJV on price McDermott and Schroeder are getting for premium quality Acala cottons due primarily to the improved length and strength of newer Acala varieties.

“It is bringing a premium of 5 cents per pound over the regular Acala premium due to length and strength,” according to McDermott. “And it does not have to be roller ginned to get that extra nickel per pound.”

Variety has much to do with some Acala bales reaching a 41 and 42 staple — “a Pima bale,” according to Schroeder. “The market is looking for premium cotton.”

The SJV moniker has always carried weight in the market. The added premiums now coming out of the valley make that weight a little heavier.

“Growers are producing a good bale. Many gins are doing an excellent job preserving quality, and we would like to think we are creating a better market for those premium cottons,” said Schroeder.

“Mills will say I want a premium SJV,” said McDermott.

The high quality premium Acalas are in demand mostly by international mills. “There is big demand from Indian mills for high strength SJV Acalas, yet India is one of the world’s largest cotton producers,” McDermott noted. India is expected to replace the U.S. this year as the second largest cotton-producing country in the world behind China.

Roller-ginned Acala has been touted as one route to these premiums. However, McDermott questions whether roller-ginning Acala is the right choice for everyone. Although he admits there is a growing market for that style of cotton, the premiums may be less than many are being told. Also, merchants said this is a Catch 22 situation since roller-ginned Acalas cut into the market for Pima, now the dominant cotton in the San Joaquin.

Roller-ginning Acala reduces neps, agreed McDermott. Many growers are able to produce premium length Acala without roller ginning.

“Some large premiums for roller-ginned Acala were mostly smoke and mirrors. They would compare a 36 staple saw gin to a 40 staple roller gin. If you produced 38 and longer staple saw-gin Acala, you would already receive a premium.

“If a grower’s saw-ginned cotton makes a 40 staple, he will probably lose money roller ginning because the cost to roller gin it would be more than the premium he would get for it,” added Schroeder.

On the other hand, if you have a 38 staple Acala, roller ginning could bring it to a 40 and a nice premium,” said Schroeder. Both merchants said the value and premiums for roller-ginned Acala are dependent on the season’s overall quality. “Last year we saw little difference between saw-ginned and roller-ginned Acala because the overall quality was so good. Some years there is a wider spread.”

“Roller-ginned Acala is creating its own niche market. It is increasing every year, but the premiums we are getting go to improved length and strength.”

Pima cotton has been a godsend for SJV growers. Demand is strong, even if prices have not been as strong as growers expected. It still brings 20 cents or more per pound than Acala. Average yields are about the same and it costs no more to grow it.

“Pima is selling out every year. Mill demand is strong because of the Supima licensing program,” said McDermott.

“Pima is a good choice in a difficult market.”

However, with the looming 2008 water crisis, Pima could take a major hit just like Upland.

“Unfortunately, most of the Pima is grown in areas where the water crisis will likely be the worst,” said McDermott. That is in the sprawling 600,000-acre Westlands Water District on the West Side of the San Joaquin.

Unfortunately, good times for U.S. Pima and relatively strong prices in recent seasons have increased world competition from China and Egypt.

“Pima mill buyers have more choices than they used to as prices went higher increasing world ELS production. China now grows Pima. There is plenty of Giza from Egypt and the roller-ginned Acala has also been an alternative to Pima that was not there three years ago,” said Schroeder.

Overall, Pima growers are also reaping the rewards of producing a premium grade Extra Long Staple cotton in the San Joaquin competitors cannot.

“You have to differentiate your product in this market, and we think we are doing that with this premium quality approach to marketing,” said Schroeder. “Premiums keep an edge in the market; premiums keep growers in business in this admittedly rough market. Our job is to get the maximum price we can for him because without him staying in business, we are out of business.”

Both men say 2008 will be for the cotton loyalists. “It is obvious cotton production inputs have gone up much faster than cotton prices. Growers are not doing as well as they would like to be doing.”

“We are telling growers to look at 2008 and 2009, not at 2007 prices. The 2008-2009 market could be quite explosive as more acreage goes out. Growers who plant cotton in 2008-2009 will be able to take advantage of that,” concluded McDermott.

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