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Cotton’s front burner - China, farm law, supply-demand, weather

Cotton’s front burner - China, farm law, supply-demand, weather
Three of the nation’s cotton leaders - Jarral Neeper, Wally Darneille, and Gary Adams - discuss the key challenges facing the U.S. and global cotton industries during the the Arizona Cotton Industry Meeting. Neeper of Calcot Limited shares his price predictions for Upland and Pima cottons.

The U.S. cotton industry is locked in a global tug-of-war – China on the left side of the rope, a mud bath in the middle, and many other fiber-producing countries on the right.

Despite the odds, China has the upper hand.

Three of the nation’s cotton leaders shared their latest views on the key challenges facing the U.S. and global cotton industries during the Arizona Cotton Industry Meeting held in Flagstaff, Ariz. in June.

Sharing the podium was: Jarral Neeper, president and chief executive officer (CEO) of the Calcot Limited cotton cooperative; Wally Darneille, board chairman for the National Cotton Council (NCC), and Gary Adams, NCC agricultural economist.

Neeper, based in Bakersfield, Calif., says the worldwide cotton industry is at a crossroads with China clearly behind the steering wheel.

For the last three years, the Chinese government has stockpiled cotton in a failed effort to support domestic grower prices. China, the world’s largest cotton producer, has nearly 60 million bales in storage; the bulk of it in government reserves.

“The problem lurking for the world cotton industry is how China will reduce its stocks – how quickly and under what circumstances,” Neeper said.

China stocks

As China releases stocks, the government plans to reduce its cotton imports to an estimated eight million bales annually. This compares to about 18 million bales annually over the last four years. China’s top customer for cotton imports is the U.S. so imports from the U.S. are expected to fall.

Meanwhile, Neeper says other factors are impacting the global cotton industry. An excess in polyester-producing capacity is creating very competitive pricing for polyester – cotton’s top rival.

Polyester companies are marketing synthetic fibers as the ‘fiber of choice.’ Yet surveys continue to reveal that consumers prefer more cotton in clothing than polyester.

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Overall, the world’s cotton growers continue to produce more cotton. Neeper says worldwide cotton acreage is expected to inch up 2.3 percent yet worldwide yields are expected to fall due to regular weather maladies around the globe.

Turning to cotton consumption, USDA expects global cotton consumption to increase 2.2 percent – in line with world economic growth. Production is expected to surpass consumption for the fifth consecutive year. World production could total 115-116 million bales this year.

Cotton prices

Neeper delved into cotton price projections which quickly perked up ears in the audience. The Calcot leader predicts that the range for nearby futures during the 2014 marketing year could be 69 cents to 72 cents per pound on the low end to as high as 84 cents to 86 cents per pound on the high end.

Turning to extra-long staple (ELS) Pima cotton, Neeper said grower expectations for price this year are quite bullish with some producer talk in the $2 per pound range for a good reason – Pima demand currently exceeds the supply.  

While U.S. Pima growers produced about 630,000 bales last year, Neeper believes production will fall this year to 450,000 bales to 500,000 bales.

California produces 95 percent of the U.S. Pima supply. A third year of drought and price-driven crop competition has reduced California Pima acreage from 186,000 acres to 140,000 acres (estimated).

While some Pima growers want $2 per pound, Neeper expects Pima prices will likely fall in the $1.75 - $1.85 range per pound - perhaps up to $1.90 a pound.

“This is a very fair price for producers and mills,” Neeper said.  

He added, “It’s not a good idea for us to price ourselves out of a strong market moving forward. “If we go hog wild with Pima prices this year, I think we would price ourselves out of the market going forward.”

There should be little downside due to the tight Pima supply and demand.

NCC Chairman speaks

NCC Chairman Wally Darneille is president and chief executive officer of Plains Cotton Cooperative Association, the largest originator of U.S. cotton to textile mills worldwide.

Chairman Darneille said the most critical challenge the U.S. cotton industry faced last year was the passage of the new multi-year farm bill into law.

“I was afraid it would not happen. Fortunately we got it signed,” Darneille said.

Once enacted, the process quickly shifted into law implementation mode where about 400 issues awaited decision making.

“Unfortunately, people who wanted to fight certain issues during the writing of the bill tried to come back in the implementation process and make further changes,” Darneille said.

These discussions were delayed until later this year.

“Major challenges still lie ahead,” he continued. “Even though we believe the legislation is well written and the intent is clear, there will always be challenges through the appropriations process.”

The new farm law – the Agricultural Act of 2014 - includes many changes to resolve Brazil’s challenges against the U.S. cotton industry, a conflict handled by the World Trade Organization (WTO).

“We believe we achieved everything required on this issue in the new farm bill,” Darneille said. “Frankly we did a lot of the work through the 2008 farm bill on Brazil’s challenge. It is amazing that we are still fighting this issue.”

Darneille has many concerns about the WTO and its handling of the Brazil challenges.

Higher calling

The NCC chairman contends its time for cotton-producing countries worldwide to stop fighting each other and instead focus on higher priorities.

“We need to work together to increase cotton consumption,” Darneille said.

Other issues on the NCC’s front doorstep are efforts to improve the flow of U.S. cotton.

“A bale of cotton is not worth a darn thing until you get it to the mill door,” the NCC leader said. “It is too big to be a doorstop, too hard to move around, and it doesn’t start to have value until someone starts to make something out of it.”

Efforts to improve the flow of cotton impacts the farmers’ bottom lines which in turn helps the entire industry, he says. Part of the public relations pitch for cotton is focused on cotton sustainability.

“We need to tell our story,” Darneille emphasized. “U.S. and Australian cotton should be the poster children for responsible cotton production.”

Gary Adams, NCC vice-president of economics and policy analysis, says the U.S. cotton industry is in a tug-of-war with its global competitors. The new farm law increases market orientation for U.S. producers while relying more on crop insurance to handle weather anomalies.

Adams will succeed current NCC President and CEO Mark Lange when he retires at next year’s NCC annual meeting.

The economist also discussed the Chinese cotton stockpile situation. There are several issues to watch moving forward.

First, how will China manage the quality of the estimated 60 million bales accumulated over the last three years?

Rotten cotton?

“Baled cotton doesn’t get any better with age,” Adams said. “Will China roll the inventory, sell it overtime, and how long will it take China to move it through its system?”

Another speaker at the conference noted that baled cotton will not rot or spoil necessarily, but the fiber will turn an off-white color which can lower the value.

Adams’ second question is how much support can China convey to their cotton farmers and still be within the limited imposed by WTO commitments?

Beyond China, India is the second largest cotton producer in the world. India is gaining ground on China, and by 2015 Adams says India could pass China as the number one producer. India is the world’s second largest cotton exporter behind the U.S.

Closer to home, USDA predicts a 7 percent increase in U.S. cotton acreage this year. Adams says acreage could top the 11 million acre mark – higher than last year due to lower prices for grains.

USDA believes U.S. cotton production could total 15-16 million bales this year. Adams agrees, but recent rains in Texas over the Memorial Day weekend will be a key factor in determining the overall crop.

The key to watch, Adam says, is the demand picture for U.S. cotton. U.S. mills currently use 3.5 million bales of U.S.-grown fiber. With new U.S. textile plants coming online in 2015, their cotton demand could increase to 3.6 million to 3.7 million bales.

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