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Calcot surviving a floundering cotton industry

Calcot is alive and financially sound.

However, the Bakersfield, Calif.-based once mighty cotton marketing cooperative is down to just one California cotton warehouse in operation and for the first time in decades is shedding its corporate wings.

It’s not just Calcot. The total U.S. cotton industry is struggling, and it was made painfully and locally evident in the reports of the chairman and president of Calcot, at the cooperative’s quartet of annual meetings in Bakersfield; Glendale, Ariz.; and El Paso and Robstown, Texas.

At its peak, Calcot marketed 2.2 million bales of cotton, all from the San Joaquin Valley and Arizona. For the 2007-2008 crop Calcot took delivery on a little less than 800,000 bales, and 55 percent of that came from Calcot’s recent takeover of Southwest Irrigated Growers (SWIG) cotton in Far West Texas and New Mexico, and the cooperative’s foray into South Texas four years ago where it continues to pick up acreage — 30,000 in the past year.

The cotton free-fall in California is not over yet, according to Kern County, Calif., cotton producer and Calcot Board Chairman Charles Fanucchi, and cooperative President Bob Norris, who predicted SJV acreage could fall to just 150,000 acres next year. At most he said it could reach 250,000, which is still less than the 257,000 this season, the lowest SJV cotton acreage since 1934.

Norris said after the Bakersfield meeting, SJV upland acreage likely will not exceed 50,000 acres in 2009. The rest will be Pima, but how much will depend on the extra long staple price and water.

Fanucchi said the three looming, critical issues facing California agriculture for 2009 are “water, water, water.” Cotton must compete with a cornucopia of other crops for a limited water supply, as a result of a two-year drought and judicial rulings giving fish (rather than people and production of food and fiber) first rights to federal and state surface water supplies. The most recent prices for cotton have put it at or near the bottom of cropping option lists.

Fanucchi also announced the cooperative once again has punched a hole in its corporate belt to tighten per bale marketing costs.

He said:

– Calcot continues to reduce its labor force and has frozen wages, which are 20 percent lower than last year. Some Calcot executives have voluntarily reduced their salaries.

– Calcot will close its Hanford warehouse when the 2007-2008 crop is sold out, leaving Bakersfield as its only warehouse location.

– It has restructured its board, creating a 17-member executive committee to meet regularly to oversee the cooperative’s business. The full 45-member board will now meet only three times per year rather than eight as a cost-cutting measure. Phoenix, not Bakersfield, is likely to become the gathering point for board meetings, since it is a more centralized location for the cooperative’s marketing area that now stretches about 1,500 miles from the northern San Joaquin Valley to South Texas.

– The cooperative’s retains/revolving fund is being stretched from five to seven years to provide more stable footing to survive these hard times.

– The Calcot corporate aircraft will be gone in mid-December. Fanucchi said it will be returned to GE credit.

“Times are as tough as I’ve seen in my lifetime,” said Norris, who has logged more than four decades in the Western cotton business, all with Calcot.

Calcot normally announces its final pool payments at late September annual meetings. Not this year. It was only meager progress payments. There is 2007 crop left to sell, and Norris said the pool likely will stay open to the end of the year.

Calcot is not alone. Half the U.S. crop is still not committed to a mill buyer.

“This was not a season I want to repeat,” Norris said, detailing a litany of train wrecks that characterized 2007-2008. This included steadily increasing U.S. production coupled with falling exports during the season; failure once again for China to import what was projected; increasing production from India to fill markets normally served by U.S. cotton; a worldwide credit crunch and sluggish U.S. economy resulting is slower sales.

The nail in the coffin came in February when supply demand fundamentals suggested lower prices on cotton; however, prices skyrocketed. Norris did not take time to explain the complicated reasons why, but others have indicated it was due to index fund trading in commodities.

This upside down fundamentals picture “brought sales and even inquiries to a halt,” he says.

Margin calls drained cash from merchants and co-ops alike. One long time merchant went out of business, according to Norris.

Calcot met its margin calls, but it tied up capital and halted progress payments.

Considering one disaster after another, Norris said it was an “accomplishment” for Calcot to weather the storms.

Norris told growers this marketing season there will be fewer bales to sell once again.

“I see our industry in California continuing to shrink,” he said.

It is that way across the entire the U.S. Cotton Belt, where plantings totaled only 9.4 million acres compared to 15.3 million just two years ago.

“It is clear our industry is undergoing some very painful changes,” says Norris.

Ever the optimist, Norris said the reduction in U.S. cotton supplies “can only help us work off very large stocks. ”It could reduce stocks from the 9.9 million bales going into this season to going out of 2008-2009 with just under 5 million bales, assuming USDA is right in its estimate of 14.5 million bales of exported U.S. cotton.

World cotton consumption continues to grow. There is a 12-million bale gap between world production and consumption.

Weather in China, India and Pakistan has not been ideal, according to Norris. Those countries combined consume about 83 million bales, but produce 69 million. This should present good opportunities for U.S. sellers, noted Norris.

SJV Pima acreage is also down sharply this season, but prices are still below what growers want this year and next. High prices are floating around, but no one is doing business at those prices, according to Norris.

“If growers can get a bio-engineered Pima variety, I do see Pima as having a future in the San Joaquin Valley,” said Norris. There are genetic Pima varieties, but the problem is that they have not been approved in the international marketplace.

As for SJV upland, Norris says seed contracts may keep upland in the Valley.

Despite its cutbacks and plummeting acreage, Calcot is not in financial trouble, espouses Norris, adding that the cooperative has added 90,000 new acres in the past two years. Most of this has been from SWIG and South Texas.

Nevertheless, the U.S. cotton crisis is not over, according to Norris, who expects the economy to remain fragile into next year, “but I do think cotton prices will improve.

“I think we’ll come through this current economic crisis and things will improve,” he says.

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TAGS: Cotton
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