Three fundamental problems are costing U.S. cotton growers money and re threatening the industry's survival in the world market these days: A quality standard that is out of touch with the world market, the premium and discount sheet associated with it and a farm bill written at a time when the U.S. was exporting its surplus.
“It's time for change,” cotton marketing expert Ed Jernigan told a group of farmers at the recent Southeast Cotton Conference in Rocky Mount, N.C.
Short of change, Jernigan fears the same fate for the cotton production sector as happened in the textile industry.
“If the industry doesn't police itself, someone will,” the president and CEO of Globecot and the Jernigan Group says.
Back in 1985, when many of the features in the current farm program as it relates to cotton were introduced, the U.S. was producing 14 million to 16 million bales of cotton and exporting about 11 million bales.
“Between 1985 and 2002, the cotton program worked very well,” Jernigan says.
“The program was designed to export this cotton regardless of price. “Today, we're in a different world.”
Last year, the U.S. produced a record 23-million bale crop. While the U.S. consumes about 6.1 million bales of cotton, the U.S. has to export a little less than 17 million bales.
“Think about the burden that creates” on the world market, Jernigan says. “It actually brings up the issue, ‘Is there any price that this kind of volume will move?’
“No one has talked about the problems this kind of production has created and how the farm bill works to create some of these problems,” Jernigan says. “The first thing I would tell you is my opinion and I'm one man.”
Drawing on the analogy in the book, “Who Moved My Cheese?” Jernigan told the group of farmers and agribusiness professionals that, indeed, the cheese has moved.
“The base quality for U.S. cotton is wrong,” he says. “Strict-low middling 1 1/16 type of cotton is out of touch with what's going on with the world trade. I know you've been told that's what the domestic mills want you to produce, but that's not what the rest of the world wants you to produce.”
The big market for U.S. cotton now is Chinese mills, where the standard for quality is 1 1/8. Much of the world is also growing a higher quality cotton these days, including Australia, Brazil and Greece. The only people left exporting 1 1/16 cotton are the U.S., India and Pakistan. “I think the base grade we have in the United States is costing you the grower money and costing the taxpayers a lot of money.
“Because strict low middling is our base, and that's what our futures market is based on, it means that the price has to reflect a discount piece of cotton.”
Looking at the markets last year, Jernigan says the numbers looked good for an increase in price, but “the bull market last season came and went in three month. The U.S. grew the wrong type of cotton and had the wrong base quality.”
New York futures for July dropped almost 27.5 cents while the basis levels for the rest of the world sharply increased. “That is a wake up call to anyone in the industry, considering the bullish statistics.”
In the past, China came into the cotton market for 1 1/16 cotton when they had shortages. An increase in consumption in China, as well as a collapse in the domestic market, brought China into the market. This time, they were looking for middling 1 1/32 and middling 1 1/8 cotton. In the Chinese grade system, 1 1/16 is the lowest grade. “The U.S. cotton industry was not prepared for this to happen,” Jernigan says. “China now looks at U.S. cotton as the cotton of last resort.”
In effect, the bear market has followed the over-production of cotton in the U.S. and has increased the importance of the CCC loan premium and discount sheet.
Jernigan says the P&D sheet is also out of touch and “antiquated.” In effect, there is no incentive for growing quality cotton.
He points to south Texas production this past year, where growers had one of their best crops ever. “Most of the cotton was 1 1/8,” Jernigan says. “It had a lot to do with varieties and the growing season, but what happened?
“Did the growers get a large amount of money for that cotton?” Jernigan asks rhetorically.
Basing their decision on economics and looking at the P&D sheet, the south Texas growers largely made a call to stripper pick it. “The P&D sheet says a 170 point discount for bark. They did the economics, stripper picked it and did not certify it as FiberMax. It became a generic piece of cotton and it will never reach its potential nor make the money.
“Can we blame the grower?” Jernigan asks. “If you look at the P&D sheet, he made an economic decision.
“It brings home to me that there needs to be some change made,” Jernigan says. “This behavior is making the U.S. cotton sector fall behind the rest of the world.”
Jernigan says Australia has established a set of discounts to discourage growers from producing 1 1/16 type cotton. “I'm not saying we should advocate that, but if the U.S. is competing against Australia, this is what they've done to get their quality in line.
“It's time to change the 40-year standard of strict-low middling 1 1/16 and the P&D sheet associated with it,” Jernigan urged.
While calling for change, Jernigan notes that some are resisting it. “My fear is that this could spell big problems in the period ahead,” Jernigan says.
Recounting the decline of the U.S. textile industry at a time of a corresponding decline in domestic consumption, Jernigan fears the same fate for the production sector.
“The U.S. textile industry reacted to the decline by focusing on the Washington lobbyists,” Jernigan says. “I did not hear anyone take a realistic approach as to just how uneconomical is was to hold up a labor-intensive industry. I did not hear one out-of-the box solution.”
The drop in domestic consumption continues to haunt the U.S. cotton industry.
Jernigan fears that the same approach of “supporting key senators and not discussing the issues” is currently taking place as negotiations for a new farm bill have begun. “Paranoia seems to be developing.”
This time around, however, the cotton program will not be below the radar. “I'm worried about what will happen if these issues are not discussed,” Jernigan says “If they're not, we could have the same thing happen that happened in the U.S. textile industry.”