Cotton markets rally, yields tumble It's a typical good news/bad news situation this year for many cotton producers in the lower Southeast, says Bob Goodman, Auburn University Extension economist.
"The good news is that prices are going up. The bad news is that we don't have any good cotton to sell," said Goodman during a recent cotton tour in east Alabama.
"You've probably noticed in the past few weeks that we've had a little bit of a weather rally in the cotton market, especially since the August crop report was released stating that we'd produce 19.1 million bales with a five-million bale carryover," said the economist in early September.
"I don't know why the market would go up, especially considering an estimated five million bale carryover. But no one believes we'll produce 19 million bales of cotton. Most people say that we might produce fewer than 18 million bales," says Goodman.
Other factors The adjusted world price has increased, he adds, while the POP payment has gone down. "The POP payment is the difference between the loan rate and the adjusted world price. The A-Index has gone up, making our cotton a little more competitive.
"Maybe we can ship more of our cotton overseas. This surge has made it more difficult, but we still are hoping for some export business so that we don't end up with five million bales."
The price rally is being driven, notes Goodman, by hot and dry weather conditions during the growing season in the Southeast and in Texas.
"If the crop doesn't continue shrinking, then this market will turn around in the other direction. If the cotton crop continues to shrink throughout the fall, the market will respond favorably. We could see cotton at 70 cents, or maybe even a little more.
"If the crop doesn't keep shrinking, and if we can't do some export business, the market will stay down. If we're supposed to do about seven or eight million bales in export business, and we're doing only four or five million bales, then the market will react negatively. Our export business needs to pick up so we can take advantage of the shortage in the world market. The world market will draw down stocks this year, but the U.S. market will build stocks. We really need our export business this year," he says.
Those cotton producers who manage to survive this year might see an improved market in the near future, contends Goodman.
"Whatever happens this fall with the world situation, I think we'll see a real impact on prices here in the United States. I think this summer marked a turning point, and we're finally seeing some light at the end of the tunnel after suffering through an awful couple of years."
This year's cotton crop, however, probably will be worse price-wise than last year's crop, he adds. "Not only because we have less cotton to sell in the Southeast, but also because the world price has increased and the POP has gone down. Even though the price has recovered some, the total money received by the grower may be the same or less than last year.
"But for the coming year, I think there's a real opportunity in the cotton market for some returns and more realistic prices."
Low-interest loans With the drought claiming many cotton acres in Alabama and other areas of the Southeast this year, growers now are eligible for low-interest USDA disaster loans, says Goodman.
But the decision on whether or not to take out such a loan should not be taken lightly, he says.
"One Alabama farmer recently told me that he took out some of these loans back in the late 1970s and early 1980s, and that he finally paid off the loans just a couple of years ago.
"This is not free money, and it's a very important decision for the farmer to make. You have to pay it back. And, it's a secured loan, so the government will want some collateral. It's been a hard year, but many factors should be considered before taking out such a loan. Sometimes, it's better to cut back or quit rather than to commit yourself and your family to many years of hardship."
According to the terms of USDA disaster loans, producers suffering a loss of 30 percent or more will be eligible for one to seven-year loans (depending on their situation), covering up to 80 percent of losses with a maximum indebtedness under the program of $500,000.
All emergency loans must be fully collaterilized. A first lien is required on all property or products required, produced or refinanced with loan funds. The specific type of collateral required may vary depending on the loan purpose, repayment ability and the individual circumstances of the applicant.