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Is export upside worth 10 percent of safety net?

Are U.S. cotton producers willing to give up some of their safety net to harvest more of the upside from uptapped international trade? It is a paradoxical question on many minds as numerous dynamic market forces converge in the coming years.

According to Gary Taylor, president of Cargill Cotton Co., if U.S. cotton producers can hold on, biofuel and world food demand will push domestic corn and soybean prices higher. At the same time, explosive demand for fiber from China and India will require a consistent, strong supply of U.S. cotton, forcing cotton prices higher to compete for acreage.

Meanwhile as globalization and free trade take hold, crops will shift to areas where they can most cost-efficiently be grown. “And that's the way it ought to be. Sustainable food and fiber growth is what I believe we have to gain from trade.”

Taylor, speaking at The Seam's cotton marketing seminar, in Tunica, Miss., said the growth of China's economy is for real and reason for U.S. producers to be optimistic.

“About 70 percent of China's 1.3 billion people live in the country. Their income is around $20 to $50 per month. They grow their own food, but have very little income. Three percent of them are moving to the city every year. When they reach the city to work, their incomes increase eight-fold to ten-fold, to $200 to $300 a month.”

A large percentage of that income, up to half in some Asian countries, will be spent on food, according to Taylor, which will place a strain on the local agricultural resources. “Somebody is going to have to grow the grain. In China's case, they are covering up 1 percent to 2 percent of their land every year in concrete for parking lots, factories and housing. China used to be one of the biggest corn exporters in the world. They are now a corn importer, and it hasn't even started yet.

“The outlook for grain, soybeans and wheat is about to change big time. And we're going to have to find ways to increase yields and find new acres. Let's don't lose sight of that. China just came out some unbelievable numbers on their economic growth. It's running about 12 percent a year.”

Growth of the middle class in Asia also bodes well for U.S. cotton growers, according to Taylor — witness the huge increases in global cotton consumption over the past few years. “From 1992 to 2002, world cotton consumption grew by 10 million bales. Since then, we've grown world cotton consumption 20 million bales.

“It hasn't shown up in the market, I'll give you that,” Taylor said. “But think of that kind of growth going forward. Think about a 5 million-bale world consumption growth every year and having to keep up with that. That's why I'm optimistic. I really think we're into the beginning steps of the next quantum leap.”

One possible wrench in the machinery could be the price of oil. As long as oil and gasoline prices remain high, ethanol production will remain feasible. Luckily, expectations are that gas and oil prices will not decline and biofuel demand will continue to grow.

Today, ethanol represents about 3 percent of total fuel use in the United States and uses 13 percent of the corn crop. By 2012, ethanol will represent about 8 percent of total fuel use and will use 39 percent of the corn crop.

As long as oil prices are above $50 a barrel, there is a good incentive to make ethanol from corn. Ethanol made from corn costs the same as gasoline when oil prices are at $40 a barrel, while ethanol made from sugar cane is equivalent to oil at less than $30 a barrel.

Improvements in seed breeding that produce higher turnout in ethanol production could move the breakeven for corn closer to $35 a barrel in oil prices.

Problems with ethanol production could start to emerge as competition among plants increases. “Be careful about investing in ethanol plants. We could have a bust in five years. It's important that an ethanol plant is built to scale. Most co-op plants are not. The second point is to build it in the right spot, and many co-op plants are not. People want to build it in their back yard.”

An ill-conceived location might suffer from the high cost of transporting feedstock, the ethanol itself and byproducts, like DDGs. “You have to build near a distribution point. Ten years ago, all you had to do was put up a plant and you made all kinds of money. That will change when we have too many plants.”

The biggest thing American farmers could lose in globalization is their safety net, Taylor acknowledged. But he's optimistic. “I don't want to see a 47-cent loan, and I don't want to see a 10 percent cut in counter-cyclical payments. Those are pretty devastating things. But I'm not sure that I'm not willing to give up some of that to harvest the upside.

“It's scary to not have that safety net. That's the paradox. We obviously want to get it done in a way that serves our agricultural interests well. But I think we're going to look back on this and wonder why we were worried about a 47-cent loan when we're selling cotton at 75 cents.

“I personally believe that the upside is far more appealing than the risk of the downside. There are paradoxes and cycles and so forth, and we're due for it. But free trade plays right into our hands. Outside of Brazil, nobody can produce cotton as cost-effectively as the United States.”

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