Low cotton prices? No problem — U.S. producers will grow it anyway. That just one of several "destabilizing" factors currently facing the cotton industry, says Don Shurley, University of Georgia Extension economist.
"U.S. cotton acreage largely has been unresponsive to price, and this creates a potential over-supply situation," says Shurley. "We had a tremendous increase in world production and ending stocks for the 2001 crop, and that's part of the reason for such low prices."
The U.S. textile industry is another cause for concern, he adds. "Cotton use in our textile mills is down by more than 30 percent since 1997, and a lot of this is the result of plants closing down in the United States and plants opening in other countries. It's not so much that U.S. plants are cutting back, but the production capacity no longer is there," says Shurley.
Even if the U.S. economy improves and mills become more profitable, they never could reach their former production capacity, he says. "This past year, our mill use was just over 7 million bales. In 1997, the textile industry used 11.2 million bales. Our textile industry is hurting, and that has serious implications for the cotton industry."
There has been a tremendous increase in cotton imports into the United States, notes the economist. "We're not talking about raw cotton. Raw cotton doesn't come into this country to a great extent due to trade restrictions. We're talking about imports either of fabric or finished goods.
"Much of this cotton may be our own, and it's coming back here in the form of finished products from China or Mexico," says Shurley.
The strength of the U.S. dollar also has had an impact on cotton markets, he says. Although the dollar has weakened in recent months, it has strengthened during the better part of the past two years. This, says Shurley, has attracted more imports to the United States and has made U.S. exports more expensive to other countries.
Another destabilizing factor has been cotton yields, he continues. "We have not seen the kind of yield increases in the late 1990s that we saw earlier in the decade. We're not sure if this is due to weather or transgenic varieties, but growers are struggling with yield issues that make their current situation even more severe."
Turning to cotton prices, Shurley says the 35-cent level seen this past crop year is the lowest since 1985. The loan rate, he adds, was at the 52-cent level.
"This past growing season marks the first time in the past 10 to 12 years that prices have dropped below the loan rate for any significant time."
Growers are somewhat better off in terms of price this year than last year, with current levels in the low 40s, or 7 or 8 cents more than in the fall of 2001, says Shurley. "We certainly have broken out of the floor, but we have a long way to go if we're to get back to a decent price."
Cotton acreage in Georgia, North Carolina and other Southeastern states increased significantly from 1993-95, he says, during a time of good prices.
"In the past three to four years, due to over-supply and weakening demand, prices have dropped. However, it isn't so bad when you add on the LDP. This is why our acreage hasn't been responsive to price.
"Last spring, futures were in the 40s, but no farmer who planted cotton expected to get 40 cents for his crop. Even if cotton is in the 30-cent range, you'd have a 20- to 30-cent LDP to tack onto that. No one is responding to price - they're responding either to the loan rate or the possible LDP."
Turning to the world market situation, Shurley says there's a direct correlation between weakening cotton prices and the strengthening of the U.S. dollar against other currencies. The base price for cotton in the United States and the A-Index or world price move together, he says.
"Over the past couple of growing seasons, U.S. prices have weakened relative to the A-Index. Our over-reliance on exports and our depressed mill industry have contributed to this. We're not going to get an improvement in U.S. cotton prices in absence of a movement in the A-Index.
We can't have 60- to 70-cent U.S., cotton while, at the same time, have a world price of 40 to 50 cents. That'll never happen.
"One reason is because our mill industry is down so significantly, and we're even more reliant on exports. We can't export 10 or 11 million bales and have New York futures in the 60s. The best medicine for U.S. cotton prices is for the world supply situation to become more balanced. That will pull up the A-Index and U.S. cotton prices."
Cotton growers should see an increase this year in the A-Index, says Shurley. "When the world stocks-to-use ratio comes down, and stocks get smaller relative to total supply, we'll see an improvement in prices. We're now at 40 percent stocks-to-use worldwide. When we look back to other years when this figure was 40 percent, we see an A-Index that was significantly above current levels.
"Encouraging things are happening with the world supply-demand picture, which leads me to believe the A-Index will strengthen. We should see an improvement in our prices. But I'm not sure we'll be better off in terms of total price because LDP's are tied to the world price."
If the A-Index and U.S. prices improve, farmers will see more cash in their pockets in terms of what they're getting from the market, but the LDP will do down, says Shurley. "So, the total money may be no different than what we're already getting. Some would argue that the total money outlay will be less."
Looking at this year's cotton crop, Shurley says average yields won't be as high as in 2001, and harvest also appears to be running behind last year's average.
This year marks the first time in the past three of four years that U.S. cotton acreage has declined, he says. "Frankly, there aren't many alternatives for Southeastern growers. Even after three to four years of terrible prices, cotton acreage in the Southeast has remained fairly stable and mostly has trended upward since 1990."
Although U.S. production may be down by about 11 percent this year, total supply won't change much due to old-crop carryover from last season, says Shurley.
"The big unknown is on the demand side. The estimate for U.S. demand is set at about 7.9 million bales — a slight improvement over last year. We might see some improvement in the U.S. textile industry. Although the textile industry has shown signs of making an adjustment, I don't know that we'll ever get back to a level of 10 or 11 million bales.
"If the maximum amount of cotton the U.S. textile industry uses is 8 or 9 million bales, we must have continued high rates of U.S. exports. The mill industry continues to trend downward, but we've been fortunate enough to pick that up in the last couple of years with exports. But it has taken 30- to 40-cent cotton to accomplish this, and that's a concern."
Total offtake, says Shurley, has been excellent, but an increasing amount of U.S. cotton must be shipped overseas, where it's placed in an increasingly competitive market.
Turning to world supply and demand, world production is expected to be down this year by about 2 percent, he says. World demand for cotton is expected to be up by about 2.5 percent. This marks the third consecutive year world demand has set a new record.
"Worldwide demand for cotton is strengthening. While the U.S. mill industry has suffered, other countries have picked up the pace. And we're expected to continue to draw down worldwide stocks."