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Cotton growers should ‘bite the bullet’ for loan schedule change

If U.S. cotton producers are to continue to export most of their cotton production to China and other countries, they must push for changes in base quality on the current loan schedule, according to O.A. Cleveland, professor emeritus, Mississippi State University.

“Two years ago, we consumed 6.5 million bales of cotton domestically,” said Cleveland, speaking at the National Cotton Council's 2006 Beltwide Cotton Conferences, in San Antonio. “Last season, we jumped to 6.7 million bales as prices were 10 cents a pound lower than they are today. So we should not expect to see domestic consumption to climb back to 6.5 million bales. In fact, we should expect another 500,000- to 800,000-bale reduction by 2010.

Cleveland said American cotton producers “must look to the export markets of the world, and particularly China, for their future. In this regard the industry must bite the bullet and swallow the bitter pill and support a move that updates the loan schedule and brings it in line with the world export market.

“The historical base, strict low middling 1-1/16 inch cotton should become a discount grade in the loan schedule just as it is in the world market. Growers can help themselves through this by aggressively voicing their support for a premium being paid for quality.”

Cleveland noted that China continues to be a huge market for U.S. cotton. “Were it not for China, I would be worried about the 6.9 million-bale carryover level for the current year.”

However, this level of carryover could become a threat to the U.S. cotton producer if cotton quality standards slip, according to Cleveland. “Cotton production is an oxymoron unless the phrase becomes quality cotton production. So the loan schedule must be changed as there is little incentive for the United States to move to quality cotton production without this change.

“In general, neither cooperatives nor the merchants offer any but scant reward for quality cotton production. They prefer to spread quality gains over all growers simply because they are either too fat and happy – like me – or they find it too taxing to work to change the system they inherited and that has not been changed in nearly half a century.”

On the other hand, “the American cotton grower has lacked an aggressive attitude with his cooperatives and merchants in forcing this change. The grower can do this. Yet, the real question is, will the grower demand such from his marketing agent, or has the grower become far too complacent about his cotton marketing responsibility.”

Cleveland noted that he was a supporter of the Step 2 Program, conceived to prop-up the domestic textile industry. “However, let’s face it. It was a total failure and actually sped up the demise of the textile industry, even though the textile industry was doomed to failure anyway because of globalization and the general trade policies of the United States.”

According to Cleveland, research indicates that Step 2, “increased domestic consumption by only about 50,000 bales a year. Studies at Texas Tech University showed that we only increased exports by 150,000 bales a year. So Step 2 was a fairly expensive program and if we have to cut things, that’s where we need to cut.”

Cleveland noted that Nashville-based Globecot has been the only group that has accurately forecast consumption in China for the last three seasons. Globecot is estimating that Chinese consumption will climb to 45 million bales this season, with a chance to climb as high as 46 million bales.

“China and the Indian Sub-Continent account for 80 million bales of the cotton consumption on an annual basis. However, only China is a major importer of U.S. cotton. Other major users include Turkey and Mexico.”

Cleveland was careful to note projecting the cotton situation for the coming year is tricky at best. For example, last year, U.S. production was estimated at 19.5 million bales, but by year’s end, it had ballooned to 23 million bales. Likewise, exports were forecast at 14 million bales, but ended up being too low by 2.4 million bales. Carryover was projected at 7.5 million bales, but ended up at 6.9 million bales. Only domestic consumption at 6 million bales was accurately forecast.

With the caveat that things could change dramatically, Cleveland projects that the United States will produce 21.5 million bales of cotton in 2006-07 on 14.5 million to 14.8 million acres.

Cleveland says pre-plant conditions this year aren’t as ideal as they were for the 2005 crop. “In 2005, abundant subsoil moisture in the Southwest contributed to excellent yields. This year, the Southwest and Mid-South have been droughty.”

He projects domestic consumption to fall by 200,000 bales, to 5.8 million bales. Carryover could increase 7.4 million bales, “which could become problematic for cotton in the farm bill debate. However, a crop of 21 million bales or less would lead to declining stocks.”

Cleveland projects a world crop of 112 million bales with global consumption at 116 million bales. “A typically active cotton market will see a price swing of about 25 cents from low to high in any given year. My price range for cotton this year is 48 cents to 68 cents.”

One factor that could affect cotton prices positively are Senate and House resolutions condemning the government of Uzbekistan and its communist dictator Islom Karimov. “The last time similar resolutions were passed by both chambers dates back to the U.S. government’s support of Nelson Mandela. The European Commission has joined the fray in asking for criminal prosecution of the Uzbek Interior Minister, equivalent to our attorney general.

“The White House expressed concern that Karimov would destroy the Uzbek cotton industry before he would give in to the demands for human rights. This is a hot spot that could rock the world cotton industry any day and lead to as much as a 10-cent move to the upside before pausing for a reality check. Yet it remains a great unknown.”

According to Cleveland, the greatest challenge facing the U.S. cotton grower in the coming 18 to 24 months is the coming debate on the farm bill, “given the administration’s intent on cutting support for U.S. agriculture in general and signaling out cotton specifically. Historical relationships between various sectors and regions in the cotton industry will be tested.”

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