What is in this article?:
- Cotton market volatility suppressing Southeast acreage
- Drought at planting time
- Profit tables turned
• Long-time cotton industry analyst Jerry Marshall says most of the ‘why’ goes back to the recent record high prices for cotton and the entrance into the cotton buying arena of well financed investment groups.
• The volatility has made it more difficult for growers to know how much cotton to plant and the high risk involved with higher input costs just makes cotton too risky for growers to go all-in on cotton.
COTTON ANALYST Jerry Marshall says $2 a pound cotton is still hurting growers.
Drought at planting time
Extremely dry planting time weather in southeast South Carolina and the growing uncertainty over cotton prices, led some to believe the cotton acreage may be comparable to 2011 levels at best. The continued increase in peanut acreage is another indicator that cotton acreage won’t increase.
The uncertainty over planting for 2012 fits along with the ongoing volatility of the cotton market, says Marshall. “Right now cotton is truly a tale of two markets and that makes it tough for cotton growers to pull the trigger on planting a lot of cotton,” he says.
Marshall says, the first part of the two markets for cotton was shaped from May of 2010 until March of 2011, when the cotton market peaked at $2.27.
Prior to 2010, mills didn’t have much inventory, because of the financial crisis in 2008-2009. When business turned out to be not as bad as some economists had forecast, it was hard for mills to restore their cotton stocks.
In 2009 and 2010, and even into the first part of 2011, business was good for textile mills all over the world. Spinning mills were used to living ‘hand-to-mouth’ in terms buying cotton.
Many of the new generation of leadership in textile mills had only a history of seeing people who forward buy cotton lose money, and they were quite comfortable with no forward cover for their textile mills.
“At that time, very few cotton buyers had cotton bought more than a month forward. Reports of large carryovers from the 2010 crop, which proved to be wrong, further influenced cotton buyers to hold off building up cotton stocks,” Marshall explains.
When buyers found there was a shortage of cotton, buyers began to buy cotton anywhere they could find it. Prices kept rising and buyers kept chasing cotton at any cost.
The buying frenzy, was close to a panic in the cotton industry, and the result was record high prices for cotton.
During this time period, the demand for cotton yarn went up higher than prices. Textile mills were making more money when they bought cotton for $1.20 a pound than in previous years, when cotton was selling for 75 cents a pound. As a result nobody in the spinning industry stepped on the brakes when cotton prices went past $1 a pound.
Shortly after the cotton market peaked at over $2 a pound it collapsed.
“From talking to people around the world in the textile business, I believe that when cotton prices reached $1.75-$1.80 a pound, the cotton industry hit a wall on their ability to pass prices forward. So, we over-shot the level at which textile mills could pass along the cost of cotton price increases by more than 40 cents a pound,” Marshall says.