Even if you're discussing the cotton market, it's impossible to ignore the 900-pound gorilla — the corn market.
“There's record demand for corn now, and everyone wants to talk about ethanol,” says Robert Goodman, Auburn University Extension economist. “The corn market is the 900-pound gorilla in crop markets.”
But the real driving force behind the current surge in corn prices is exports rather than ethanol, says Goodman. “Farm exports are up $8.3 billion over last year, which is a significant amount of money, and corn exports alone are up by $2.1 billion to nearly $9 billion. There's a real strong export demand for corn, and basically, we're out of corn,” he said, speaking at the recent East-Central Alabama Cotton Meeting held in Shorter.
Turning to cotton, Goodman says the United States harvested only 12.8 million acres in 2006, with a large amount of abandoned acreage.
“This past fall, we were expecting a very poor cotton harvest, and we expected cotton prices to increase,” he says. “We expected cotton prices to be well into the 60s by this time, but they're not there, and there are several reasons for this.”
The No. 1 reason, says Goodman, is that the U.S. crop turned out much better than most people expected. “Even the crop here in Alabama turned out better than we had imagined. Who would have thought in July of last year that Alabama cotton producers would average more than one bale per acre? My estimate was leaning towards the low side of 400 pounds per acre. Conditions looked awful here and in Georgia,” he says.
But the crop, he adds, made a turnaround, with more cotton being produced in the United States and in the world than had been forecast.
“U.S. mill use and exports are expected to be down. U.S. mill use has been on the slide now for five or six years. The U.S. spinning industry is gone — we are now in the world market. There are a few guys who are still spinning cotton, but we have to sell our cotton overseas. Whenever there's a big foreign crop, they're competing head-to-head with us. That cotton already is over there, so they'll use it first,” says Goodman.
Exports have been slow, he says, at increased prices. “They know the government is going to store our cotton for free. It'll be here when they need it. We have become the residual supplier — the other cotton must be used first. And we don't have the big advantage in quality that we once did. We're the residual supplier, so we have to worry about this world surplus of cotton,” he says.
Another reason for the current low prices is the loss of Step 2, says Goodman. “Our cotton is now three or four cents from where it was. It doesn't sound like a lot, but at the margin, a few cents is a big difference in how much cotton we're able to move,” says the economist.
All of the U.S. Western states saw a decline in cotton acreage this past year while the Southeast states saw an increase, he says. “It's getting more difficult to grow cotton in the dry desert Southwest, and Texas had a big weather event this past year. But maybe we're starting to see a real comparative advantage in cotton production in the Southeast, and maybe Alabama no longer will be a marginal cotton producer. Perhaps we're getting to the point to where we can produce cotton cheaper than anywhere else,” says Goodman.
U.S. cotton yields were at about 820 pounds per acre this past year, while Alabama growers produced just over one bale per acre, he says.
“We still have a ways to go in Alabama, but you have to consider that we don't have that much irrigated cotton. And a lot of that more than 800 pound per acre from this past year was from irrigated ground. So we don't have as much ground to make up as we think.”
The only statistic that illustrates that 2006 wasn't a very good year for cotton production is the large amount of abandoned acres, says Goodman. “Where it was bad, it was very, very bad, and it shows in the acres that were abandoned this past year,” he says.
Traditionally, cotton prices have not had an impact on U.S. planted acreage, he says, but that could change this year. “We may see a change this year if the price of corn drives down planted acres of cotton.”
In August of 2006, USDA was estimating a cotton crop of just over 20 million bales, he says. By February of this year, that estimate had risen to 22 million bales, representing a 2 million bale increase during the fall of 2006. This has been a drag on the market, notes Goodman.
There has been some strength in new crop cotton prices, said Goodman in February. “The 50-cent level appears to be the base level. December 2007 cotton has been below 60 cents since early fall, but it's kind of coming back. Still, these prices are not good news for guys looking to grow cotton this year. I think this upward trend will continue, and old and new crop will continue to show strength as long as the corn bubble doesn't burst, and as long as we plant that big corn crop.”
The market knows that something is different about this year, he says. “The market knows something is going on. It knows that farmers are talking about putting this big corn crop into the ground and that we could see a tremendous crop in U.S. planted cotton acres. Moreover, Chinese farmers and Brazilian farmers also are looking at $4 corn. I'm hopeful, from the standpoint of the cotton market, that we'll see a tremendous increase in world grain acreage, as farmers throughout the world try to take advantage of this price bubble in the corn market.”
It's still not a certainty, however, that cotton prices will increase further, says Goodman. “Many farmers have the following scenario:
“I am not going to plant corn. I'll let everyone else plant it, but I'm going to stick with cotton. If that happens in the United States and in the world, cotton prices will not improve because we already have a tremendous amount of cotton stocks.
“But if the corn goes in the ground, and if we have good planting weather in the United States and overseas, we will see some improvement in cotton prices as world stocks decline. U.S. stocks are very high, but world stocks aren't excessively high.”