2009 SJV cotton acreage drop may be tempered by problems of dairy industry

California’s largest cotton marketing cooperative announced last fall it was closing its Hanford cotton warehouse as a result of declining cotton production.

Jarral Neeper, Calcot’s vice president of marketing, told the Central Coast Cotton Conference a few bales remain to be shipped from Hanford.

However, the remaining cotton there may be moved to Calcot’s Bakersfield headquarters before it’s sold because the Kings County warehouse is filling fast with government-owned powdered milk.

Calcot rented space in the facility to an Oregon man who has a contract to store government surplus powdered milk.

The irony of surplus powdered milk in a cotton warehouse is inescapable since it has been dairies and their insatiable demand for forage crops that have been partly responsible for plunging state cotton acreage that bottomed out at its lowest level in 70 years — 270,000 acres in 2008.

“These are some of the most daunting times I have seen in the cotton business,” understates Earl Williams, president of the California Cotton Ginners and Growers Association.

Unfortunately, many believe the situation will get worse before it gets better. Predictions are California cotton acreage will dip to just 150,000 acres this season with the majority of that Pima. The rest of the U.S. cotton industry may be talking about politically-correct sustainability — but California is more concerned about survivability.

Williams, Neeper and J.B. Boswell Farming Marketing Director Jeff Elder, who is also chairman of Supima, told one of the largest crowds ever at the cotton conference they believe it will survive. The only question is at what level.

The general consensus is that it will be 2010 before there is a turnaround in the U.S. cotton market, after excessive world carryovers are worked off in the wake of plummeting demand due to the world economic crisis.

Neeper, after the conference in an interview with Western Farm Press, says rays of that turnaround may shine in 2009. He believes acreage in California could be closer to 200,000 than the 150,000-acre projection, as the dairy industry struggles with overproduction and reduces demand for alfalfa and silages as herds are reduced.

Neeper acknowledges cotton acreage will fall this season. However, he points to the tons of powdered milk stacking up in Calcot’s Hanford warehouse to back up his prediction that this season may not be as bad as many believe.

The dairy industry is in big trouble. Milk prices are about half what they were a year ago. They have plummeted very rapidly in the past three months as the world economic crisis and reduced consumer spending crashes down around the dairy industry as it has with other industries.

This has sent alfalfa and forage prices tumbling at the beginning of what Neeper described as the early stages of a dairy economic slump. Alfalfa and forage crops replaced a lot of cotton acreage in California in recent years. That trend may be reversing since the profitably gap between forage crops and cotton has narrowed, according to Neeper.

The last economic decline the dairy industry experienced lasted 18 months, Neeper noted, which gives cotton industry leaders hope that acreage could pick back up.

Reports are circulating that dairies are already selling animals to raise money for feed and there is talk of another big dairy buyout program to reduce production.

“Cotton cannot compete with processing tomatoes, vegetables and other high value crops, but if a San Joaquin Valley producer can yield 1,667 pounds per acre and sell it for 72 cents per pound, cotton can compete with corn, wheat or alfalfa,” says Neeper.

This is a break-even yield and price. Not included in the equation are gin rebates, counter cyclical payments, direct payments and loan deficiency payments.

“I was talking about the economic situation with Charlie Fannuchi, our chairman, and he says guys are talking cotton again because of the dairy situation. Cotton may not have a big profit margin, but it is moving up the chain of cropping alternatives for the San Joaquin Valley,” Neeper says. “Cotton growers want to grow cotton if they have an economic choice.”

Neeper readily admits the state irrigation water situation tempers optimism for cotton or any field crop. Orchards and vineyards will get available water this year as California enters its third straight drought year. The natural drought is compounded by “judicial droughts” coming from the courts to protect the Delta smelt and other endangered fish species that are also limiting water movement through the Delta.

Neeper pencils out the break-even point for cotton using production costs of about $1,165 per acre with $55 to $60 per acre foot water for costs. The average yield for California upland cotton in 2008 was 1,414 pounds of lint per acre.

“Everyone’s costs and yields are going to be different. What I am saying is that cotton may pencil out against crops it had no chance against last season,” he says.

“I think we are going to see somewhere between 175,000 and 200,000 acres of cotton this season,” Neeper projects. “We may not lose as much acreage as many originally thought.” Asked what he thought the upland-Pima percentages of that may be, he suspects the pendulum will swing toward Pima, “but I don’t care what it is, as long as it is cotton.”

The biggest concern for those who remain in the cotton business is what the infrastructure will look like when the turnaround comes that Williams and others predict.

Williams acknowledges that many businesses like trucking, chemical companies and equipment dealers will not be impacted by cotton’s downward slide like cotton gins and cotton warehouses.

Fifty-one gins existed in 2008, but seven were idled. There were almost 300 in 1963. Those that stayed open last season did so partly through strong cottonseed prices. The dairy industry was partly responsible for those prices, but with the milk price collapse lately, cottonseed prices have come down as well.

Williams acknowledged it will be a challenge for some of the remaining gins to stay open, but he is confident the California industry will survive.

Specialized cotton — Acala for decades and for the past 20 years Pima cotton — has been the mainstay of the California cotton industry. Williams does not expect that to change.

“High end, high quality has always been what separates us from the others, and it will be the same in the future. And California growers will be paid for that quality,” said Williams.

This quality reputation is being enhanced with a growing quantity of roller-ginned Acala bales. This cotton can bring premiums of 12 cents per pound or more for growers. Three years ago 54,000 bales were roller ginned. Last year it was 138,000, and this season Williams predicts it will be more than 160,000 bales when it is all tallied for the 2008-2009 marketing year.

It costs more to roller gin Acala, but growers still get profit over processing costs to roller gin Acala. While this helps keep some growers and gins in cotton, it is done at the expense of both saw-ginned upland and roller-ginned Pima. Some textile mills are substituting roller-ginned Acala for more expensive roller-ginned Pima.

Cotton will remain in the Valley, Williams predicts, because some areas have limiting cropping alternatives compared to other areas because of soil types or geography.

“What will it take for cotton to make a turnaround in California … acres, acres, acres,” he said. That will take more water for cotton, improved lint prices and high cottonseed prices.

California cotton growers pulled a rabbit out of a hat in the late 1980s when the San Joaquin Valley began producing high-yielding, premium-quality Pima cotton. The percentage of U.S. Pima coming from the Valley went from 1 percent in 1987 to about 95 percent in 2008. There have been more Pima acres in the San Joaquin the past two years than Acala.

Unfortunately, Pima acreage has plummeted right along with Acala/upland in California.

“Pima has enjoyed 22 years of steady growth in the San Joaquin Valley until this year,” according to Elder. It fell from 815,000 bales in 2007-2008 from 257,000 acres, to 400,000 bales in 2008 from 171,000 acres. Elder does not expect 2009 production to go much above 300,000 acres.

Dramatically declining consumer demand for cotton has hit the Pima industry as well, according to Elder.

Fortunately for Pima, several years ago Supima created a licensing program for mills to use American Pima cotton. If they use 100 percent Pima in their products, they can attach a Supima label to those products. They pay $5,000 annually for that privilege. Over 300 such licensing agreements are proving to be the salvation for Pima right now.

Elder says there are 3 segments of the Pima market; two of which use Pima to make a better product, but both of these segments are price sensitive and are markets that are disappearing in the current economic crisis.

However, the licensees and others who need Pima to maintain products like wrinkle-free shirts and slacks will continue to buy American ELS cotton, regardless of price. This, Elder says, will be the assured California and U.S. market.

“What is that market? I don’t know, but we will soon find out,” he says. Pushed for an estimate, he says it likely is somewhere between 150,000 to 300,000 bales.

The Pima market for the past six months has been dead because of the uncertainty in the retail market, acknowledges Elder.

The market has gone up 10 cents in the past month, however, as retail inventories are being worked off, added Elder.

Neeper noted that the federal competitiveness provision for American ELS cotton has also been triggered due to low world ELS prices. Effective Jan. 30, ELS marketing certificates of about 18 cents per pound became available. “This will help get the grower a little more money and reduce the cost to the mill a little.”

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