There is little doubt cotton acreage will be down significantly across the Southeast this year, the question that constantly pops up at grower meetings is: Why?

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.

When cotton was grown, bought and sold by cotton people, the industry had its ups and downs, but these were much easier to predict. Now that large investment companies are highly involved in buying and selling cotton there is much more volatility and people with the most experience in the business end of cotton often aren’t the ones making major decisions.

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.

Exactly how many acres of cotton is in the ground in the Carolinas and Virginia is going to be difficult to know until the crop is harvested. Despite projected acreage of 3.05 million in the Southeast, the continued strong showing of soybeans and the continued volatility of the cotton market may push cotton acreage lower in the region.

Mark Hodges, who is co-owner and operator of Mid-Atlantic Gin in Emporia, Va.,, says he expects about 80,000 acres of cotton to be planted in Virginia this year. If accurate, that would be a 30,000 acre drop from last year.

In North Carolina, the projections are for as much as a 15 percent drop in cotton acreage from last year. Even conservative estimates call for a drop of 100,000 acres in the Tar Heel state.

The USDA Planting Intentions Survey calls for South Carolina to plant 340,000 acres in 2012, an increase of 12.2 percent from 2011. Farmers and consultants in South Carolina contend that level of increase won’t happen, and that any increase in cotton acreage in the Palmetto state is not likely.

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.

Profit tables turned

“As a result, what had been huge profits for textile companies worldwide quickly turned into huge losses. Those losses are continuing to influence how much cotton is being planted, or more correctly, how much cotton is not being planted, he adds.

“When cotton prices hit $2.20 a pound, polyesters were selling for less than half that amount. So, mills that could switch from cotton were forced to do so quickly to stay in business in many cases. On a worldwide basis, the cotton industry probably lost 5-6 million bales of cotton to polyester, just because of price of finished goods.”

“The second market, the new market, which is really a return to prices that better fit 20 and 30 year price trends, is now vastly different from the cotton market we knew prior to the 2009-2011 run up on cotton prices.

“The number of defaults on cotton, after the run-up on cotton prices, has risen dramatically. In 2011, there were 244 arbitrations to settle defaults. In the first quarter of 2012, world courts averaged one application for arbitration each week. In the past, arbitrations usually ended up 20-30 cents a pound lower than the contract prices. Now, differentials of 60-80 cents a pound are common,” Marshall says.

Bangladesh is the second largest cotton importing country, trailing only China. If reports from world cotton organizations are accurate, a high percentage of textile mills in the country are broke. The losses in the cotton industry are huge — unprecedented, Marshall says. The fallout, worldwide, he adds, continues to influence cotton down to the grower level.

“In the past the cotton industry owned the cotton exchange. Now, Wall Street investors essentially own the buying and selling of cotton in the U.S.,” Marshall says.

“Wall Street investment managers can throw more money into cotton in a day than the old cotton industry could throw in a month.

“For example, Exxon-Mobile has a market capitalization of nearly $400 billion. That one company could conceivably buy every bale of cotton grown in the world for the next seven years,” Marshall adds.

From the halcyon days of $2.20 per pound cotton, the market has meandered its way through several ups and downs, mostly created by cotton stock building in China, to a low of 68 cents a pound by June 1 of this year.

This type of price volatility has a direct bearing on how many acres of cotton are planted.