U.S. farmers are trying to “drive their steak and eat it, too?” That little bit of witticism is typical of the comments grain analysts and media commentators have been making in the ongoing debate over the world's requirements for food-vs-fuel.
But the dynamics behind such comments may also hold the key for a possible rebound in cotton prices to the highest levels since March 2004, according to Carol Skelly, fibers analyst with USDA's World Agricultural Outlook Board.
Skelly, a speaker at the Beltwide Cotton Conferences in Nashville, Tenn., said rising energy prices and the use of agricultural commodities — such as corn and soybeans — for fuel have integrated the agricultural and energy markets. “As one soybean analyst recently said, ‘You can't drive your steak and eat it, too,’ she noted.
Cotton is part of this picture because it competes for acres with corn and soybeans in the Southeast and Mid-South. In 2007, with corn prices rising above $4 per bushel, cotton lost. It could lose more acres this year to $5 corn and $13 soybeans, analysts believe.
Skelly, a frequent speaker at the Beltwide Cotton Economics Conferences in recent years, said the U.S. and global markets have become increasingly linked by the United States' position as the world's largest cotton exporter.
“As long as it appeared U.S. cotton could comfortably supply the gap between foreign consumption and production, cotton prices stayed relatively flat,” she said. “Monthly spot prices were below 50 cents for most of the period from August 2004 until June 2007.
“But with world cotton stocks falling and demand for agricultural products in energy markets rising, there is greater uncertainty about whether the United States can fulfill this role. A cotton analyst might say, ‘You can't drive your steak and wear your shirt, too.’”
This surge in demand for biofuels — farmers planted nearly 13 million more acres of corn in 2007 than in 2006 — affects cotton because it constrains cotton production, Skelly notes.
“The question I think the market is trying to answer is ‘How much cotton does the world need from the United States in 2008-09 and will the United States supply it?’” she said. “This is dangerous territory as there are many more opportunities to be wrong than to be right.”
USDA's latest forecast has world cotton stocks falling nearly 10 percent by the end of the current market year (July 31). Foreign stocks were already relatively tight at the beginning of the season since the United States held most of the world's surplus stocks (9.48 million bales).
“And foreign stocks are likely to tighten further as the season progresses, resulting in demand for exports from the United States,” Skelly said. “Declining stocks in 2007-08 are one key to the 2008-09 outlook because world production will need to rise in 2008 to meet rising demand.”
As so often seems to be the case these days, China holds the wild card in the question over the adequacy of U.S. stocks. China is the largest customer of U.S. cotton, and the United States is China's biggest supplier.
“Current purchases by China in world markets, especially purchases from the United States, indicate China's imports will remain fairly weak through the first half of the season,” Skelly says.
“However, the China supply-demand balance sheet for 2007-08 shows that, with production about even with last season and consumption rising, China's imports will likely rise to 14.5 million bales. Thus, we anticipate China's imports will be concentrated in the second half of the season as they were in 2005-06 and 2006-07.”
The uncertainty surrounding China's cotton needs is part of the reason U.S. cotton prices have not been following corn, soybean and wheat futures. As of week 22 of the marketing year, commitments had reached 46 percent of the total needed to reach the forecast of 16.2 million bales. But those purchases could be moved to later this marketing year.
Skelly noted USDA will not make any official projections about the U.S. and world cotton outlook until the USDA Agricultural Outlook Conference, scheduled for Arlington, Va., in late February. But she gave farmers attending the Beltwide Cotton Conference her personal opinion about what could transpire in the markets.
“World cotton consumption will continue to grow in 2008-09, but at a slower pace, adding a potential 3 percent or nearly 4 million bales, to reach a level of about 132 million,” she notes. “Over the past five years, world consumption has climbed rapidly, averaging nearly 6 percent per year, well above the long-run average of below 2 percent.”
Growth in world consumption for 2008-09 will need to be offset either by higher world production or by a further drawdown of world stocks. At the projected consumption level, world stocks could fall another 3 million bales next season and still be minimally adequate, according to Skelly.
“World production would need to rise about 6 million bales. However, foreign production will need to rise more than 6 million bales due to likely reductions in U.S. production, which will put additional pressure on foreign supplies.”
Given the competition for acres between cotton, corn and soybeans, forecasting how much cotton U.S. farmers will plant this spring will be “extremely difficult,” she says. Most analysts are predicting acreage could fall from 2007's 10.8 million to somewhere between 9 million and 10 million acres.
If plantings reach 10 million acres, more normal abandonment and yields about equal to 2007 would put U.S. production at 16.6 million bales or 2.4 million below 2007. On the other hand, planted area of 9 million acres could drop U.S. production below 14.5 million bales or nearly 2.5 million fewer bales for a total annual reduction of 5.0 million.
At the higher level of U.S. production of 16.5 million bales, foreign producers would need to grow another 8.5 million bales to achieve a 6-million-bale increase, says Skelly.
China, the world's largest producer, is not projected to make significant gains in production due to strong demand for food crops in that country, but China could add another 1 million to 2 million bales with slight increases in area and higher yields.
“With rising area and yields, India could contribute another 2 million bales, and countries which had lower production in 2007 — Pakistan, Australia, the African Franc Zone and Turkey — could make a partial recovery from weather, price and insect problems, adding 3 million to 4 million bales,” she said.
“Brazil has the capacity to raise production if prices are attractive, possibly by another 1 million bales. Thus, 7 million to 9 million bales of foreign production appear to be achievable if prices — and weather — are favorable.”
But Skelly also sounds a note of caution about the U.S. crop. “If it falls to 14 million bales — as illustrated by the 9-million-acre and only-average-yield scenario — foreign countries will have more difficulty off-setting the loss, and “world stocks could come under pressure not experienced since the mid-1990s.”