By Don Shurley
Cotton’s resurgence in Georgia and the southeast region, in general, is due to several factors, including boll weevil eradication, a combination of economic factors and favorable timing that made it feasible for producers to build base prior to the 1996 Farm Bill. Other influences were higher-yielding varieties, availability and use of irrigation, and the option to update crop bases with the 2002 Farm Bill.
This poses the question. Why do farmers grow cotton, or any specific crop for that matter? There could be many reasons but the first that come to mind are: agronomic capability to do so, economic advantage compared to other crops and management desire and capability.
Economic comparative advantage (incentive) to produce something depends on many things, including yield, cost and price. In this regard, the U.S. cotton industry appears to find itself in a real quandary. The big question: Is this a short-term problem or a longer-term concern?
• As I write this, the December ’08 cotton futures price is roughly 73 cents per pound. This compares to $6.60 per bushel for corn (average of September and December futures) and $15.30 per bushel for soybeans (November futures). Cotton (December) has been as high as 90 cents per pound or higher. This current price in the low 70s is near the low of where new crop prices have been to date. Corn has ranged from more than $5 to almost $8. Soybeans have ranged from $10 to over $16.
• U.S. cotton acreage has declined from 15.3 million acres in 2006 to 9.25 million acres this year – a decrease of almost 40 percent in just the past two crop seasons and the lowest acreage since 1983. In the span of just three consecutive seasons, the industry has gone from one of the highest acreages in history to one of the lowest.
• Due to higher corn and soybean prices, producers have proven they are capable and willing to make large shifts in acres. Assuming producers did this in search of higher net returns and assuming higher returns are realized, the impact of such a shift on the producer is positive. The impact on cotton support industries and infrastructure, however, is a different story. Ginning, warehousing, hauling, cottonseed processing and input suppliers are hurt financially by the dramatic shift away from cotton.
Corn prices have increased, in large part, due to the demand for use in ethanol. To compete for land, particularly in the Midwest, soybean prices followed suit. Cotton has been affected because it too must compete for land in Cotton Belt states.
Market prices for all commodities have increased. Volatility has also increased. Reasons for this are many and complex. Basis has widened, option premiums have become very expensive, and many of the “tools” used by producers to manage price risk don’t seem to be as attractive as they once were.
World Production Drops
For the 2008 crop year, world production is expected to be down 5 million bales from last year and 7 million bales below 2006. Most of this is accounted for by a decline in U.S. acreage and production. Use is still trending upward but the pace has slowed over the past three years. The stocks-to-use ratio (an indicator of how tight supplies are relative to demand) is expected to be 42.3 percent – the lowest (tightest) since the 1994 crop.
Despite the expectation that supply/demand will tighten considerably this season and next, cotton prices (Dec ‘08 futures) are currently struggling to avoid the 70-cent area. Seventy-cent cotton will not make producers happy about the 2008 crop. If corn and soybean prices remain high, to avoid another decline in acres, cotton must eventually move to where tightening supply/demand suggests they need to be. Dec ‘09 futures are currently around 86 cents.
Cotton’s future competitive position vis-à-vis other crops depends on:
• Net returns of other crops. Will high corn and soybean prices continue?
• Changes in cotton yields, technologies and costs.
• Changes in commodity and trade policy that impact price and market share.
• Marketing and ability of the producer and industry to adapt and find solutions to deal with the environment of high volatility and wide basis.
Don Shurley is professor
and cotton economist with the University of Georgia. He can be reached
at (229) 386-3512 or via email at: email@example.com.
Cotton information can also be found at www.ugacotton.com