Production costs playing big role in cotton's decline
Dec 15, 2008 9:33 AM,
By Forrest Laws
Farm Press Editorial Staff
How low will it go? That’s what many in the U.S. cotton industry are asking about planted acreage for the 2009 crop. Most predictions are for 8 million acres while a few pessimistic souls say it could drop to 7 million.
Cotton futures in the 30- to 40-cent range of late certainly aren’t helping growers’ visions of planting more cotton next spring, but those low prices don’t tell the whole story, according to an agricultural economist with the University of Arkansas.
Despite the bleak price outlook — he expects December 2009 futures to rise somewhat next spring — cotton may still produce gross returns “very competitive” with other crops, says Kelly Bryant, director of the U of A’s Southeast Research and Extension Center. The problem, he says, is that cotton just costs more to grow.
“Operating costs for cotton have increased 25 percent in the Mississippi Portal from 2003 to 2007 and by 33 percent Beltwide,” says Bryant. “One notable trend during this period is a 50 percent to 100 percent increase in seed expense while other expenses, including chemicals, have remained constant or increased slightly.”
Speaking at Cotton Incorporated’s Crop Management Seminar in Robinsonville, Miss., Bryant said high yields have helped cushion cotton farmers from those high costs and relatively low prices compared to other crops.
Conventional wisdom says high corn and soybean prices led cotton producers to reduce the acres of their crop from more than 15 million in 2006 to 10.5 million in 2007 and 9.3 million in 2008. Every cotton-producing state except one — Virginia — decreased their plantings in 2008.
Higher grain prices certainly played a role, but many growers have said they shifted large portions of their acreage to corn in 2007 and 2008 and to soybeans 2008 because “they couldn’t make any money with cotton.”
According to the University of Arkansas’ crop planning budgets, cotton shows the highest estimated gross returns per acre of any of the state’s major crops for 2009. Cotton is projected to produce gross returns of $660 per acre; corn, $595; wheat and soybeans, $490; early soybeans, $425; and wheat, $211.75.
The budgets assume an average selling price for cotton of 55 cents per pound with a 1,200-pound yield; corn, $3.50 per bushel with a 170-bushel-per acre yield; wheat, $3.80 per bushel with a 50-bushel yield; and soybeans, $8.50 per bushel with a 50-bushel yield. (The latter include deductions for basis charges of $1 to $2 per bushel off Chicago futures, which have been common in the last two years.)
“The problem is that only one of those crops — early soybeans — shows a positive estimated return above variable costs ($118.27) per acre for 2009,” said Bryant, an Extension economist and director of the SERC in Monticello, Ark.
“Cotton produces a negative return of $64.23 above variable costs compared to corn, which provides a negative return of $78.83 per acre; wheat, $87.09; and wheat and soybeans, $127.45.” (The figures do not include government payments.)
The total variable costs in the crop planning budgets tell the real story for 2009, he said. Cotton tops the list at $724.21 per acre; corn is next at $673.83 per acre; then wheat and soybeans at $617.45 per acre; early soybeans at $306.73 per acre; and wheat at $298.84.
The costs in those crop planning budgets are subject to change, of course. Fuel and fertilizer prices have dropped sharply in the last couple of months and commodity prices have shown increasing volatility. (When Bryant prepared his remarks, December 2008 cotton futures were trading at 44.03 cents per pound. They’ve since dropped to 38 cents and rebounded to 44 cents.)
But the comparisons could hold true until next spring unless prices of other crop inputs begin to drop.
What should cotton producers do in 2009? Bryant suggests they should 1) grow cotton on their best soils where insect pressure is light, 2) pray for rain, 3) protect yield and 4) do everything correctly.
“In this environment, cotton farmers can’t afford to take risks,” he told those attending the Crop Management Seminar in Robinsonville. “If something doesn’t work, cotton farmers simply can’t use it.”
He believes cotton acres are likely to decline in 2009, primarily because the 25 percent rise in production costs over the last four years is likely to continue to give Mid-South producers — and their lenders — reason to question whether cotton makes the most sense for their operations.
“Cotton still has favorable gross returns and a favorable gross margin compared to wheat, corn or a wheat/soybean double crop,” he notes. “So far cotton is not plagued with a basis or storage problem. But high yields will be critical in 2009 to earn a good return.”
e-mail: flaws@farmpress.com
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