EDITOR’S NOTE – As president of Eastern Trading Company in Greenville, S.C., Jordan Lea will never forget the volatility of the 2011 cotton crop season. In this report, he reviews what it was like while looking ahead to 2012 with optimism.
There was a period during the late 1980s when I was busy occupying a sofa and the odd classroom at North Carolina State University. I was blessed with the good fortune of being omniscient. Soon afterwards, I found myself living in Memphis and sweeping a cotton room floor where I quickly learned this industry’s most lasting lesson.
No other industry reminds one so often of one’s lack of omniscience. No two years are the same, and past performance has absolutely nothing to do with the future. 2011 has been a wild ride, and two-dollar cotton illustrated our strengths as an industry as well as some of our weaknesses.
As the year comes to a close though, I remain very optimistic about the future of not just cotton but also all agriculture for the United States.
Cotton was trading well above $1.40 at the end of 2010. Neither quality nor yield disappointed. It was hard to complain about an average yield of 850 pounds per acre, soaring prices or overwhelming demand.
Cause For Optimism
As president of the American Cotton Shippers, I had the privilege of addressing the National Cotton Council’s Beltwide Cotton Conferences in Atlanta last January, the National Retail Federation in New York City the next week and then the World Bank in Washington, D.C., the week after that.
At every venue I shared the same story. After years of using more cotton than was produced, the surplus was gone, and with prices too low to buy acres from beans or corn, the world was literally running out of cotton. The same scenario is still a cause for optimism as we look to 2012-13.
I was a hero in Atlanta, a wet blanket in the Big Apple and proof that high prices were not the result of excess speculation in Washington. It was an exciting time and a wonderful opportunity. Sadly though, two-dollar cotton was the cloud without a silver lining.
Demand remained brisk through the winter, and prices continued to soar. Various measures of volatility went so high the meter seemed broken, and margin calls for cooperatives and merchants combined were in the hundreds of millions if not billions of dollars a day. More than once the market’s daily range was equal to previous annual moves in price.
Pressure mounted on the entire cotton infrastructure to get the cotton out of the warehouse and either into the mill or on a boat headed to Asia and, in some cases, the infrastructure was failing dramatically. Far too quickly the words “producer defaults” entered the picture. A few bad apples were bringing out the grim reaper to punish all. As we entered the 2011 planting season, it still wasn’t raining in Texas, demand was drying up like Texas, and buyers began having second thoughts about their high-priced contracts.
Please don’t misunderstand me. Demand-driven markets like the one we were in are a beautiful thing; in other words, markets that go up based on consumption and not lack of supply are the markets that benefit us all. They don’t though remove us from responsibility to one another. Contract sanctity has to remain second to none.
The few producers who failed to honor commitments have cost the entire cotton marketing process as cotton will not be purchased as it was in many parts of the Cotton Belt. Cotton sales to certain markets will be affected in similar fashion as many buyers have opted not to honor high-priced contracts. This behavior has hurt and will hurt all of us.
Importance Of Risk Management
Effective risk management is the tool that will insure a safe and successful marketplace for everyone. Risk management though requires a safe and efficient hedge. The Interconti-nental Exchange, where cotton futures are now traded, has communicated well with the industry throughout the 2011 season.
The mistakes of 2008 were not repeated. Commodity markets were designed though to create commerce and to facilitate price discovery. Commercial hedgers, i.e. producers, merchants, cooperatives and mills are the constituents these markets were designed to serve and protect, and, while we need the participation of the speculative element for the benefit of liquidity, it is our market to benefit our trade, and we must continue to work with ICE and CFTC to make sure our interests are protected.
There are other equally important facets of risk management such as cotton’s infrastructure. U.S. cotton is the world’s fiber of choice. Thanks to USDA classing, every mill in the world knows what it will receive when it buys U.S. cotton.
Speed, Efficiency Are Crucial
It must though be made available to the world as fast and efficiently as possible. At times, we are the residual supplier to the world, but increasingly we are a seasonal supplier. A year’s worth of cotton now must move in four to five months. We now have to move cotton when it is wanted to where it is wanted as fast or faster than anybody else.
If we can’t, we will lose the market for U.S. cotton. Members of the National Cotton Council have been working very hard all year on cotton flow, and all seven segments of the industry will benefit from the outcome of these efforts.
It is never too early to make a marketing plan for 2012. While world economies look shaky, I think we will finally see the U.S. economy gain traction. Ending stocks in all commodities remain tight, and outside commodity prices remain strong.
Bright Outlook For Prices
China is working hard to rebuild its strategic reserves in cotton. Sadly, the La Niña weather pattern, if it holds as predicted, may keep Texas in drought for another season.
These factors should bode well for cotton prices going forward through 2012 and 2013. December 2012 and 2013 are both over 95 cents per pound. Those are attractive levels from which to start pricing cotton and should not be ignored. As mentioned, I see a very bright future for cotton and agriculture here in the United States. Warren Buffet bought a railroad because he thinks we will need to move bulk commodities from farm to port. Land prices continue to rise as do the long-term trends in yield and quality.
The day is fast approaching where cotton fiber is only one of three elements in cotton marketing as both cottonseed and its oil will be edible, and the waste will have bio-mass value.
Regardless of what pundits say about our ability to compete and/or produce, rain will come to Texas, we will continue to meet our challenges head-on, and we will produce and sell the world what it wants and needs. Those who are part of the success story that is American agriculture should plan to prosper in the meantime.
Jordan Lea is president of Eastern Trading Company in Greenville, S.C. Contact him at (864) 233-0613 or email@example.com.