The U.S. cotton price bubble is not likely to rupture soon, according to economists at the Beltwide Cotton Conferences in Atlanta.
Although no one expects breathtaking prices like the highest December futures price since the Civil War to last forever, the overheated market may deflate over time. Then again, significant air may stay in the bubble longer than many expect, since world stocks are in a precarious position and a major disaster could re-inflate the bubble.
If all that sounds a bit ambiguous, it is because three leading cotton market experts told a big crowd at the National Cotton Council’s Beltwide economic outlook symposium that the cotton market is in uncharted territory in a world economy that is far from traditional. It is difficult to forecast what the future might hold.
Calcot CEO Jarral Neeper, CoBank’s economist Terry Barr and Texas A&M economist John Robinson agreed that there will be more cotton produced and consumed in the world in 2011-2012. However, production may not be as robust as prices would indicate. Demand may be tempered by a slow recovery in advanced economies like the U.S. with developing countries having far more influence on the world economy and cotton prices than in the past.
Neeper is calling for a world acreage increase to 35.6 million hectares in 2011-12, an increase of almost 17 percent from last year; “not very much if you look at where prices are.” However, he pointed out that for the two crop seasons (2010-2011 and 2011-2012), the combined two years represent an 18 percent increase over the previous two seasons, the largest two-season increase since the 1960s. His 2011-2012 projection is slightly less than the 35.9 million and 35.7 million hectares planted in 1995 and 2004 respectively in the wake of price run-ups like the market has experienced recently.
Using Neeper’s average yield estimate of 677 pounds per acre, this would put next season’s world production at 124 million bales versus 116 million this year. “I have seen estimates of 127 million and 128 million bales,” but he said limitations are convincing him it will not reach that high.
These include the fact there is little area for cotton acreage expansion in China and India. China is more focused on domestic food production than growing cotton. India 2010 cotton acreage of 11 million hectares was the highest ever. “India may sprinkle some seed on other ground (in 2011), but I would not expect much yield from it,” Neeper said.
Big 4 production
Neeper expects the Big 4 to produce almost 70 percent of the world’s cotton projected at 124 million bales next season: China, 33 million bales; India, 28 million, the U.S. 19.4 million bales and Pakistan, 10.2 million bales.
For the U.S., Neeper is projecting U.S. acreage at 12.8 million acres from about 11.5 million this year. Those numbers are subject to considerable debate, he said. Neeper said he has “heard all kinds of things from growers” about their intentions next season. Some say they will plant more cotton; others say they will plant less.
“We had a grower meeting in Imperial Valley and 25 growers showed up. They wanted to get back into cotton, but no one has pickers. The custom harvesters were not that interested in coming to Imperial from Yuma,” he said. “Growers want to get back into cotton, but have lost infrastructure and that will limit acreage increases next year.”
Just like in the California’s Imperial Valley, the lack of cotton farming equipment in the Mid-South states of Louisiana and Mississippi is also tempering cotton’s rebound, according to Robinson. “Many growers there also have lost contact with custom harvesters.”
Breaking down U.S. acreage by regions, Neeper is looking for a 15 percent increase collectively across the Delta and South.
“How many acres will Texas plant? How many acres are there (to plant) in Texas?” Neeper conjectured. Texas has never planted more than 6.4 million acres in the past dozen years. This is about what he expects in 2011, which is about 1 million acres more than last season. However, he is penciling in a more traditional abandonment with 87 percent of the acres harvested, putting projected production about the same as last year. Neeper and Robinson said it may go above 6.4 million, but the ground available may not yield well.
“There are hundreds of thousands of CRP acres in the northwest part of Texas that could come out, but if it is plowed enough to plant it will not grow squat,” said Robinson.
The West will offer the best opportunity for the largest percentage increase, but as Neeper pointed out, acreage in the West has fallen dramatically in the past five years, especially in California.
Neeper expects Arizona 2010 acreage to hit 240,000, although there are concerns about irrigation water availability. This represents an increase of more than 20 percent over last season.
California estimate: 440,000 acres
There are water concerns in California like there have been in recent years. However, it is not the lack of water, but possibly too much. Neeper said California will likely hit 440,000 acres next season. Neeper noted that the state water project had already assured growers they’d get 50 percent of contracted water before a series of December storms dumped record rainfall and snow fall on the state. Last year at the same time they were promised only 5 percent. Neeper told his audience that the San Luis Reservoir in the Central Valley is expected to be full by the end of February. It is the major storage reservoir for both the federal and state water projects.
Releases are being made from most all the dams in the state to make room for a heavy spring run-off. Already fields are being flooded in the Tulare Lake Basis to manage the excess water.
The snowpack is 200 percent of normal, so far.
“Tomato prices are not expected to be as good as a year ago, and growers are splitting tomato beds (from 60 inches for tomatoes to 30 inches for cotton) to put cotton in,” he added.
Most of California’s 2011 acreage is expected to be long staple Pima cotton. “Growers are already holding out for $3 per pound.” Spot quotes now are $2.35 per pound for Pima.
World consumption follows production and that means a worldwide increase in cotton use. “4 percent plus or minus seems to catch most estimates,” said Neeper.
Neeper is predicting a 48-million bale consumption in China; 22.5 million bales in India; 11.2 million bales in Pakistan and 3.9 million bales in the U.S., all increases over last year. These nations use about 70 percent of the world’s cotton.
China remains as cotton enigma
China continues to be the enigma in the world cotton market. The CEO of the Bakersfield, Calif.-based cotton marketing cooperative said Chinese cotton consumption for the first three months of the current marketing year was running at an annual rate of 60 million bales, far above his projected 48-million bale estimate.
“Yarn production data is monstrous coming out of China. Pakistan and India are exporting yarn to China like crazy.
“We used to sit around and wonder what would happen if those Chinese would buy just one more T-shirt. We may be finding out what would happen,” he said.
Neeper projects the U.S. will export 14 million bales.
World carryover will increase under Neeper’s 124 million bale production scenario, but only by about 2 million bales. The U.S carryover will double, but it will be a manageable 3.4 million bales for 2011-2012 ending stocks.
High cotton prices are generating retailer headlines, and experts predict there will be polyester substitution for cotton where possible. “Polyester is cheaper than cotton, but polyester is by no means cheap.”
Neeper believes cotton will continue trading on the futures market in the 80-85 cent to $1.05 to $1.10 range until planting time.
“Everything is pointing to a pretty good year next year,” Neeper said.
Prices like that would seemingly spark a lot of enthusiasm. However, Robinson said prices for alternative crops like corn, peanuts and soybeans will temper the desire for current producers to dramatically increase cotton acreage or jump back into cotton. “And, I think some growers have learned to enjoy growing corn and soybeans versus a management-intensive crop like cotton,” Robinson added. “There is more leisure time and less labor not growing cotton.”
Economic and non-economic factors will also be part of the cotton equation for most growers.
Drier weather conducive to more cotton
“The drier it is, the more cotton that is planted,” said Robinson, citing Texas as an example. “If you think like a Texan, dry conditions induce more cotton planting. You plant cotton and insure it when it is dry.”
Robinson said similar drought conditions have prevailed in Louisiana eastward through Alabama. Robinson said growers there could start thinking like Texans. “They have already experienced drought and with the aflatoxin in corn, they may start thinking like Texans.”
For growers who have been growing corn back to back for several years, cotton prices could entice them to switch back to cotton for rotation purposes. “Growers in Arkansas and Mississippi know full well you can get a 10 percent yield boost from corn to cotton and that will influence growers in certain places.”
Glyphosate resistance could play into a rotation decision, he said. Herbicide resistance in soybeans could steer growers to wheat.
Robinson said grain elevators are being aggressive in their contracting to persuade growers to stay with alternative crops. “If a grower is making payments on a combine and on-farm storage equipment, that might be an incentive to maintain grain crops.”
In the Mid-South comparable prices for corn, soybeans and cotton are currently close, and they can change day by day.
Lenders will also play a role in 2011 cropping decisions in places like Louisiana. “With the hurricane and other problems, they have had a bad season over the past three or four years,” said Robinson. Lenders could very well tell growers to stick with less risky crops than cotton to make some money and reduce debt.
Textiles are tied directly to local and world economies, and Barr said recession recovery is under way. However, the engine that is driving recovery will be China and other Asian countries.
America and European nations will recover more slowly.
Barr said it will take longer for the U.S. to recover from the last recession than it did in the recession of the 1980s. It took five years then to lower U.S. unemployment from 10 percent to 6 percent with a growth rate of 4.5 percent annually. The growth rate out of this recession will be only 2 percent to 3 percent.