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Farm program essential to U.S. cotton

Without a strong government farm program, American cotton producers could face the same fate that has befallen the textile industry over the past five years, warns Memphis cotton merchant William Dunavant.

The industry has seen hundreds of textile plants close and thousands of jobs lost as competing nations have flooded the United States with cheap textile products.

“We've witnessed the deterioration of a great industry,” the chief executive officer of Dunavant Enterprises, the world's largest cotton marketer, said in his annual industry analysis at the Beltwide Cotton Conferences at Nashville, Tenn. “Just five years ago, it consumed 11.3 million bales of your cotton; this season, we'll be fortunate if it uses 7.5 million.”

He cited a textile industry executive's prediction that within five more years, domestic cotton consumption would drop to a maximum 6 million bales. “I agree that is a distinct possibility. Although I doubt we would go much lower than 5.5 million bales, that still would be a loss of 2 million bales from today's already low level.

“We must, must, must have a U.S. farm program that allows American agriculture to survive — and hopefully, to survive well,” Dunavant says, noting that he continues to be concerned about “a farm program that can return more when prices are low rather than when prices are high.”

“Today, March cotton is trading at 51.17 cents, but producers probably received a higher return from price with March at 37.40. The loan deficiency payment created by the farm program is the name of the game — not necessarily the futures price or the cash price.”

Cotton prices have undergone “a dramatic change” from a year ago, Dunavant noted, with an upside move of about 14 cents for the March contract.

Influencing factors, he says, are a substantial draw-down of about 1 million bales in U.S. stocks, a projected decline in world carryover to 38.8 million bales (compared to 46.9 last season), and limited availability of high grade cotton.

“Over the past four months, world price, based on the five cheapest growths, has risen from 49.15 cents to 56.50 cents, reflecting a shortage of 31 and better qualities in world markets. This will get even tighter this spring.”

Producers, Dunavant says, are wanting to know when they can receive 10 cents a pound equity for their cotton this season.

“During the last 30 days, equity prices have ranged from zero to 5 cents. The lower the quality and the higher the micronaire, the greater the equity. Today, 31-3/4 cotton in West Texas will bring no equity, while a 41-3/4 will bring a $5 equity. In the world market, it's all a game of price.”

Why no equity on high grade West Texas cotton when there is a world shortage?

“Their 31-3/4 stripper cotton won't produce the yarn counts that Uzbekistan, West African, or Australian cotton does. That's one of the reason certificated stocks are so large: the bulk of it is Texas cotton or lower strength Memphis Eastern cotton.”

The situation could change in March or April as the market addresses the shortage of world price 31-3/35 cotton, Dunavant says. “Maybe — and only maybe — will West Texas cotton in 31 and better grades and 34 and better staples bring a premium in the spring.”

A major issue, he says, is what will happen to the certificated stocks of generally good cotton when the futures contract goes from March to May and 70,000 bales of below-tenderable strength cotton must find a home in the cash market.

“Even though it isn't currently certificated stock, it won't be tenderable on May because of the change in strength requirements for that contract.” Cotton below 25 grams per tex won't be tenderable against that contract, he notes.

“Maybe the differences between March and May will solve the problem. The low strength cotton has value, but at a discount, and once that discount is realized, then differences take care of the 70,000 bales of non-tenderable cotton.”

That “should definitely encourage” cotton producers in the future to produce a fiber that is 25 grams per tex or better, or risk quality discounts that will be prohibitive, Dunavant says.

“Quality has always been a problem, but very low strength could carry a discount of 10 cents per pound. That's a strong discount — but it could happen.”

In Memphis territory and the Southeast, he notes, loan options are worth from zero to 7 cents. “If the quality is good grade, staple, micronaire, and strength it will bring a commanding premium.”

This will be more incentive to seed companies to “give producers better quality seed,” Dunavant says. “Yield is very important — but if the seed breeders don't hear the producers and mills, the future for U.S. cotton is very bleak if you want a premium.”

Looking to possible price trends in the months ahead, he says March futures likely will trade between 49 cents and 54 cents per pound, once the difference between March and May spreads out to an appropriate level.

“When the May futures contract rolls around and that contract is stronger from a grams per tex perspective, May should trade in a 53-cent to 59-cent range. As we enter the spring, the pressure on prices to the upside will be weather in the United States and around the world for the 2003-04 crop.”

Dunavant says his company's analysts are projecting 14 million acres of cotton in the United States this season, producing a crop of 17.5 million bales. “Domestic consumption will take another hit, dropping to 7.35 million bales, but exports will remain firm at 10.9 million, resulting in a draw-down of U.S. carryover to 5.7 million.

“We think world production will expand by about 8 percent, going from 87.5 million bales to 94.5 million. Consumption won't expand nearly so dramatically, going from 95.5 million bales to 97 million, only a 1.6 percent increase.”

If those projections pan out, Dunavant says, world carryover will drop again to 36.3 million bales, compared to 38.8 million this season.

“All these numbers are fairly constructive from a price standpoint. I don't think the new December contract will drop below 52 cents, and it could have an upside to 65 cents. Any problem with world production could drive U.S. and world prices higher — to well over 60 cents.

“I would continue to recommend to growers to sell equities during this crop year at levels of 2 cents to 6 cents, depending on quality. You don't want your cotton to die in the loan, because that can be expensive. If you're friendly to the market, you can buy call options, an excellent move for upside protection.”

Dunavant says he thinks “it's too early” to plan for marketing the 2003-04 crop.

“It's interesting that we project nearly an 8 percent increase in world production, but U.S. production is forecast to rise only slight. This tells me the world is certainly more price sensitive and responsive than the U.S. cotton producer. I think the nature of our farm program definitely creates this situation. Cotton futures prices need to rise to nearly 70 cents a pound to make cash prices better than the farm program protection.”

If growers are going to do any marketing for the new crop, Dunavant advises: “I would sell equities, not fix price. There are just too many question marks, both up and down, about the future. I still believe China will be the key to cotton prices in 2003-04.”

e-mail: [email protected].

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