February's "hobnailed boot" falls on cotton

In 2001, Georgia is on the road playing at Tennessee. We, the University of Georgia, are trailing by four with just 10 seconds to play.

Here’s legendary radio announcer Larry Munson’s call: “Ten seconds. We're on their 6. Michael Johnson turned around asked the bench something. And now, Greene makes him line up on the right in the slot. We have three receivers. Tennessee playing what amounts to a 4-4. Fake and there’s somebody. Touchdown! My God, a touchdown! We threw it to Haynes. We just stuffed them with five seconds left! My God almighty, did you see what he did? David Greene just straightened up and we snuck the fullback over! Haynes is keeping the ball! Haynes has come running all the way across to the bench. We just dumped it over, 26-24. We just stepped on their face with a hobnailed boot and broke their nose. We just crushed their faces!”

My apologies to all UT fans that might be reading this (sorry to bring up such bad memories). But this is a good analogy to what has happened, at least temporarily, to the cotton market. USDA’s February supply/demand report was not kind. Our noses may not be broken or our faces crushed necessarily, but we are sure bleeding badly.

The National Cotton Council’s 2009 acreage estimate, released in February, may slow the bleeding. As we all know, cotton use (demand) has been slumping due to the U.S. and global economic slowdown. U.S. producers have responded to higher net return opportunities for other crops and cut way back on cotton acres — so the production side has responded, but weak demand has nevertheless kept cotton prices low.

Well, the USDA report dropped foreign mill use by another 2-plus million bales from its January estimate, dropped U.S. mill use to below 4,000,000 bales, and raised world ending stocks by 2.3 million bales. U.S. exports of the 2008 crop were dropped a half million bales, meaning that 2008 cotton carried into the 2009 crop year beginning Aug. 1 will be a little larger than expected.

What this does is, No. 1, provide more cotton in the pipeline to compensate somewhat for less acreage in 2009 and No. 2, continue to fuel concerns about when the demand side will start to improve.

It will eventually improve but when is the unknown.

A decline in price, should the market stay at this level or lower into harvest time, means an increase in the LDP. The world price (A-Index from which the Adjusted World Price (AWP) and LDP is calculated) also declined in February, meaning an increase in LDP/Loan Gain.

The National Cotton Council released its 2009 survey-based acreage estimate in February. The Council projects 2009 acreage at 8.11 million acres — down 1.36 million acres or 14 percent from 2008. This is within the range of what most observers and analysts are expecting in 2009. USDA’s Prospective Plantings report will be out at the end of March and then the first official USDA estimate at the end of June. But for now, the market will deal with the Council number.

The Council estimates 782,000 acres of cotton here in Georgia — down almost 17 percent. Among other Southeast region states — Alabama down 33 percent, Florida up 2.5 percent, North Carolina down 12 percent, South Carolina down 18 percent, and Virginia down almost 23 percent. Texas is estimated to be down about 9 percent and the Mid-South is again expected to be down big. The Southeast, if the Council estimate holds up, would have more cotton acreage in 2009 than the Mid-South.

The Council estimate is based on a mid-December to mid-January survey of producers. But as we near planting time, there are still a lot of dynamics at play:

• Fertilizer prices have come down. As the price of nitrogen comes down, this reduces the net return advantage that soybeans otherwise might have relative to cotton and corn.

• Peanuts are grown in 10 cotton states with the largest peanut states being Georgia, Texas, Alabama, Florida, and North Carolina. The question has been asked how the recent salmonella outbreak might affect peanut acreage (and thus cotton acreage) in 2009. A farmer’s decision to plant peanuts is no different than making that decision for any other crop — you look at expected cost of production, expected yield, and expected prices (in the case of peanuts this means the availability of contracts and/or contract prices).

According to my colleague, Peanut Economist Nathan Smith, even prior to the salmonella outbreak, a bumper 2008 crop was already weighing heavily on the market. Thus far, shellers have not offered contracts for 2009.

Depending on cost of production and yield, peanuts near the loan rate of $355 per ton or slightly higher at $375 are not expected to be competitive with corn and cotton. Contracts of $400 per ton would be more competitive and might be available on a limited basis if it is anticipated that acreage might drop too much.

• Prices are unknown. When making decisions, producers need to consider not only current market levels but possible variability also. Factor in both optimistic and pessimistic outcomes. Consider marketing loan, LDP, and other protections in case of low prices.

• Crop insurance as a risk management tool is always a consideration. The 2009 APH price elections look very good for corn, cotton, peanuts and soybeans. The CRC Base Price does not look good for cotton but does for corn and soybeans. CRC is not available for peanuts.

TAGS: Corn
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