Even though cotton prices remain relatively high, the marketing environment for producers is riskier than it’s ever been.
“We’re at a point now to where you really have to make careful decisions about selling your crop because you’re well above the loan rate and you won’t have that to fall back on — it’s a riskier environment,” said Don Shurley, University of Georgia Extension economist, speaking at the recent Southern Region Agricultural Outlook Conference held in Atlanta.
If you compare the last two years with the previous nine or 10-year period, in terms of making marketing decisions and managing risks, it’s a whole new ballgame, says Shurley.
To illustrate his point, Shurley looked at data going back to 2000, including the December futures and the daily highs and lows during the January through November selling period. He compared these numbers to the loan rate.
“This gives us an average of about 60 cents, and that’s based on quality and the average basis in the Southeast. The way the marketing loan works on cotton, with the basis in the Southeast, a farmer pretty much is guaranteed about 60 cents — that’s the worst-case scenario. This is if you sit around and do nothing all year and then at harvest sell your cotton and take your POP payment,” he says.
In the past, that strategy typically has resulted in a price of 60 cents, based on the loan rate.
“The point is if you look back prior to 2010, your consequences of doing nothing or making the wrong decision were really minimal. The marketing loan was there to provide you roughly 60 cents anyway,” says Shurley.
But the past two years have brought a different environment, he says.
“If you look at the last two years, we’ve had significantly stronger prices, though we’ve seen some adjustments and probably will continue to over the next year. Even though prices have been higher, it’s a new environment simply because of the range and variability today. The variability is the result of global economic uncertainty and other factors.”
Larger than predicted
If USDA’s estimate holds true for this year, the crop will end up being 1 or 1.5 million bales more than originally predicted, in the 17-million-bale range, he says.
Other countries that are important to the U.S. — either as competitors or buyers in the export market — are having good crop years, says Shurley, and as a result, demand is flat.
“It’s bad that we’ve had a drought, but a short U.S. crop is what’s holding the market because demand isn’t doing anything,” he says.
Crop conditions have pretty much been poor to fair all year, he says, and have worsened towards the end of the season.
“Georgia had recovered up until July, and it turned dry in August. Georgia’s cotton crop has gone downhill fast. The estimated yield isn’t bad, considering conditions, but we’re walking away from one-third of the crop.”
The U.S. has seen a rebound in cotton acreage in the last couple of years after strong competition from corn and soybeans, says Shurley, adding that he expects competition from corn and soybeans to intensify more next year.
The first acreage number that came out this year was from the National Cotton Council, with 12.5 million acres being forecast.
But cotton prices improved into spring, and that number grew. As a result, the March USDA number agreed with the Council’s number. The June acreage report upped it to almost 14 million acres, and the final planting number, based on USDA’s September report, is 14.7 million acres.
“Imagine the crop we would have had if we weren’t walking away from one-third of it,” he says.
“With demand as weak as it has gotten, and with key foreign countries on pace to have a pretty decent year — given what transpired in terms of acreage — it’s apparent the market right now is being driven by weak demand.”
Acreage by region
Turning to acreage planted by region, Shurley says the key is the Mid-South. The Southeast had a 31 percent increase while the Mid-South had an acreage boost of about 29 percent.
“In 2006, we planted a little over 15 million acres. Every region is about where we were back in 2006 except for the Mid-South. Due to competition from corn and soybeans, even with strong cotton prices, those acres haven’t shifted back. What we do as far as acres next year will hinge on what growers in the Mid-South decide to do.”
Global demand has flattened due to the economic downturn, says Shurley. And while most U.S. cotton is shipped overseas, a lot of cotton shipped out of this country comes back as finished products, so even the U.S. economic slowdown has an impact on exports.
“Another thing that has worked against us is world demand. We’re making more crop than we thought we would in the U.S., and each month since May and June, USDA’s estimated global demand has been adjusted downward.”
A relatively short U.S. crop this year is being offset by good crops in China, India and Pakistan, although the final outcome of these crops isn’t certain yet, says Shurley.
“As far as the stocks-to-use ratio, we’re up around 45 percent this year worldwide, so supply has eased up in relation to demand. We’re still pretty tight in the U.S. in stocks, about 29 percent this year compared to 14 percent last year. The U.S. is the No. 1 exporter of cotton, so as long as our stocks stay tight, price will stay fairly level.”
Looking to 2012, issues that might come into play including U.S. acres, he says. “I don’t see it growing. This year’s drought has hurt a lot of people, and competition for corn and beans has intensified. The best-case scenario is that we hold acreage at about the same as this year, maybe a little lower.”
Foreign acres, says Shurley, likely will be down.
“If demand begins to improve, I don’t see any reason why we can’t stay in the ballpark where we are now as far as price goes. If demand doesn’t pick up and global economic conditions worsen, I don’t see how we can hold these prices. Some are saying already that we’ll be in the 50 to 60-cent range next year, but I don’t see that.
“At the price peanuts have been bringing, they’ll bring competition, and as long as we’re seeing the competition from other crops, I don’t think cotton will fall too far.”