This might be the worst kept secret in the cotton industry. In fact, it started being discussed last summer. Even back then and before the onslaught of untimely rains during the fall harvest, many economists were predicting that cotton acreage could increase in 2010.
Those predictions appear to be right on the mark.
However, the following questions persist: What caused the potential cotton acreage increase? Was it simply a case of an increase in cotton futures prices, or was it due to lower corn prices? Can this increase be sustained? And are these trends simply a predictable result of normal agricultural economic cycles?
Not everyone has an answer, but nobody is shy about discussing what cotton producers have been hoping and praying for during the last two to three years.
When corn and soybean acreage dramatically increased three years ago, cotton acreage decreased in several regions – most notably in the Mid-South region.
The days of $5 corn appear to have vanished for the moment, and simultaneously the New York cotton futures contract has moved into the mid-70 cents range.
Was it the perfect storm for cotton acreage to increase? Many economists think so.
Early Market Indicators
Gary Adams has been the chief economist at the National Cotton Council since 2002 and has seen his share of economic trends in that time period. He says the market signals for cotton, corn and soybeans should’ve been the first indicator that cotton was moving into a more favorable position in 2010.
“If producers are looking at the futures market as their best indicator of what to expect – including the prices of next year’s crop – and if they look at where those harvest-time contracts are trading, they have a situation where cotton is in a relatively more favorable position for 2010 than we’ve seen since 2006.”
Economists like to call these price swings “adjustments,” and Adams says the latest adjustment for this year is due to corn and soybean prices not being as attractive as they were between 2007 and 2009. At the same time, cotton prices have “adjusted” and strengthened.
What about cotton’s infrastructure? When the corn and soybean acreage boom occurred during the last three years, most cotton experts said it was critical that gins, warehouses and investment in cotton equipment be protected. For the most part, that infrastructure has been protected, according to Adams.
“I think the infrastructure is still there to handle an increase in cotton production areas,” he says. “In some areas where cotton acreage has decreased a lot, that may be a bit more difficult to achieve.”
Gins Can Handle Big Crop
Specifically, Adams is talking about gins that have shut down. That trend is probably more prevalent in the Mid-South where states such as Mississippi saw cotton acres drop to 300,000 in 2009.
Still, even with the prospect of fewer gins in the Mid-South, Adams believes there will be enough to handle a bigger crop in 2010.
“I think it remains to be seen what will happen,” he says. “Would those gins reopen or will existing gins be in a position to process more cotton? As I said before, I think the infrastructure is still there for a good recovery and more production.”
Anyone who has an understanding of commodity prices knows that volatile price swings can unexpectedly occur. Given that fact, Adams says the lessons learned in the past three years prove that producers must know how to respond to volatile market signals. That requires flexibility in all planting decisions.
Not only are those decisions affected by market signals such as the New York futures contract, but other factors must also be weighed – such as input costs. Oil prices have been as high as $130 a barrel and then dropped to $40 in a short period of time. Now, they are back to about $80.
Other published reports speculate on whether this turnaround can be sustained beyond 2010. Adams says the lowered stock level should support the price increase for now. However, if the comeback is to continue beyond one year, there is the issue of creating increased demand.
“The big thing going forward is whether the demand side can sustain itself with these higher prices,” he says. “There is the very real worry that if prices go up too much that the textile industry and spinners will be affected by competition from polyester.”
Adams, however, is quick to point out that if cotton demand increases, it will create a large enough market to support a real turnaround.
A Resilient Industry
One important fact remains clear to Adams. Nobody can accuse U.S. cotton of not being resilient and flexible. In the past eight years, Adams has seen U.S. cotton production swing from a high of 23 million bales to as low as 13 million bales. The overriding fact, however, is that average U.S. cotton yields have risen from 600 pounds per acre to nearly 850 pounds.
“When you look at the historical data, it’s pretty encouraging how quality and yields have improved despite all of this uncertainty in the market,” he says.
“We’ve really come a long way in these areas. Producing cotton with 36 staple has become almost commonplace. That’s certainly significant.”
Contact Tommy Horton at (901) 767-4020 or firstname.lastname@example.org.
Texas Producers Enthusiastic About Cotton’s Prospects
How will improved cotton prices affect Texas, which continues to rank as the largest cotton production state in the country?
Even without the price increase, Texas is once again projected to produce 40 percent of all the cotton produced in the United States.
Jackie Smith, Texas AgriLife Extension economist based in Lubbock, says the more attractive price may move additional acres back to cotton. Specifically, he’s referring to the area between Amarillo and Lubbock, which has recently seen some acres move to grain sorghum.
“If the price of cotton and grain sorghum stay where they are now, more cotton will be planted for sure,” he says.
Smith came to Lubbock 25 years ago, and he’s pleased at how Texas can now compete with any other region in the world in terms of cotton quality.
“I think the future looks good for cotton in Texas and particularly here in the High Plains,” he says. “Even with limited irrigation, we’re still making 1,000 pounds per acre in most cases. That works better than 5,000-pound grain sorghum. And, in the Lubbock area, there isn’t water to support corn in most situations.”
Cotton Has A Home In Texas
Smith isn’t ready to project a specific number for how improved prices will affect increases in Texas cotton acreage in 2010. But he knows that the 4.9 million bale figure that the state produced in 2009 could easily increase by one million bales in 2010.
That’s a far cry from the 8 million bales produced in Texas just a few years ago. But Smith says that was an unusual year when everything “fell together perfectly.”
Even if prices fell back to loan levels, Smith believes cotton will always be planted in the Lubbock area.
“A significant amount of cotton will still be here even if corn goes back to $5,” he says. “Cotton just works well in this part of our state, and this comeback in price will be good for everybody across the Belt, including producers here.”
It Pays To Be Flexible
Nobody can accuse Texas producer Ronnie Hopper of not being flexible when it comes to responding to the market.
Hopper has farmed for more than 35 years in Petersburg about 40 miles northeast of Lubbock. A lifelong cotton producer, Hopper and his son R.N. moved most of their 1,600 acres over to wheat and corn three years ago. At the time, it made sense because of lower cotton prices and attractive grain prices.
In 2010, the Hoppers will move back into cotton for the same reason they left the crop three years ago.
“This is the best thing that could happen to anybody growing cotton,” says Ronnie. “For the last three years, there wasn’t much on the horizon. We’ll take anything we can get.”
Because of the value in rotating crops, the Hoppers will stay with corn and cotton. Most of the acreage will be planted to cotton but some will remain in corn.
“It’s all about common sense,” says Ronnie. “We felt like this was the year to get back into cotton, and the cotton-corn rotation has always been a good one. The bottom line is making sure that this is a good trend for the textile mills. If they can benefit, I’d say we’re on the road to a good comeback.”