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Difficult trend continues for U.S. cotton prospects

Economists are seldom mistaken for good humor men.

They are more in line with the Dragnet Joe Friday type: “Just the facts …”

However, Tom Scott, president and CEO of Informa Economics, Memphis, Tenn., in detailing to the Cotton Board what he believes is the outlook for U.S. cotton, sounded more like an apologetic Darth Vader.

Scott, head of the business formerly known as Sparks Companies Inc., told directors of the Cotton Board that U.S. cotton prices will continue to decline in the near term (six to nine months); U.S. acreage will fall to just 6 million acres in seven years; and that America’s portion of the world cotton market will drop from the current 12 percent to just 8 percent in that same time frame. That would put the U.S. a distant third place behind China and India, which he projects combined will account for more than 60 percent of world cotton production by 2015.

Scott’s U.S. 2015-2016 acreage projection is less than half what was harvested in the Cotton Belt just two seasons ago in 2006-2007.

The reasons Scott says U.S. cotton acreage is on the decline are:

• Competition from food and energy crops, like corn and soybeans, will not go away.

• Cotton is more expensive to grow than other crops.

• Cotton biotechnology is now widely available worldwide, which is significantly increasing yields in other countries that compete in the world market with the U.S.

• Increased synthetic fiber competition.

• An overall shift in cotton production to Asia.

Scott admitted he laid out a tough environment ahead for U.S. cotton, “but this can be the first step to solutions and moving forward.”

Scott added that organizations like Cotton Incorporated, the Cotton Board and National Cotton Council are “really needed when market share is decreasing” to educate consumers, deal with trade issues and provide other support and promotional activities for cotton.

Not many at the Cotton Board annual meeting in Southern California could dispute the reasons behind Scott’s projection of the decline.

However, more than a few questioned the 6-million-acre figure as well as his near term price projections. At the meeting, specific producers from California, Arkansas, and Kansas said Scotts’ near term price outlook was contrary to what other cotton marketers are projecting.

Scott said he based his nine-month gradual price decline on a general downturn in all farm commodities coming out of a record high price period for all crops. “And we are still working off a big (cotton) carryout from the 2007-2008 season.

“We are not talking about a market cataclysm; no price collapse, but a gradual decline in cotton prices” before there is the improvement Scott projected in 2010. He also projected less market volatility in the next few months with the absence of influence from index and hedge funds. These funds decoupled fundamentals from the cotton futures market, leading to a “very difficult environment.” Their activity in the commodity markets would have been illegal a few years ago under regulations that were in place then, but not now.

“I think we will be moving out of a period of extreme volatility to moving back into a normal set of market relationships over the next 12 to 24 months compared to the past 12 to 14 months,” he added.

“I told Berrye Worsham we have got a lot of work to do,” declared Arkansas cotton producer and Cotton Board Chairman Robert McGinnis after hearing Scott’s dreary outlook for U.S. cotton.

Worsham is president of Cotton Incorporated, which will operate on an $81.1 million 2009 budget allocated from the Cotton Board, a quasi-governmental agency that administers the federal Cotton Research and Promotion Program. The funds are from assessments of American cotton producers and importers.

Worsham admitted the challenges ahead for U.S. cotton are greater than at any time during his 25-year tenure with Cotton Incorporated. Competition from other U.S. crops for cotton acres as well as competition in the world cotton market is compounded by sluggish retail sales in this country due to a slowdown in the U.S. economy.

Scott predicts that while U.S. acreage will decline sharply, yields will increase to an average of more than 900 pounds per acre by 2015-2016. This is about 60 pounds more than the projected average for this season.

During the time U.S. acreage will fall to 6 million acres, Scott predicts world supply and demand will grow. Acreage, he projects, will grow to almost 87 million acres in seven years from the current 80 million with world mill demand reaching 10 million bales more than this year.

Unfortunately, heading into this cotton growth period — trade disputes, competition from other countries and even the U.S. Congress have made U.S. cotton the punching bag of U.S. commodities and made its future much bleaker than it otherwise could be.

Scott said cotton fared worse than other commodities in the latest farm bill. It lost ground to other commodities with the loss of Step II and the ACRE program.

In its current form, it does not “pencil out” for cotton, he said. There are indications the ACRE program can be tweaked to make it friendlier to cotton.

“From a per acre standpoint, cotton is out of whack in the new farm bill compared to other commodities,” he added.

He predicts the U.S. will eventually lose its appeal of the WTO unfair cotton trade ruling in favor of Brazil. The $4 billion claim covers $3 billion for export guarantees for all commodities and $1 billion for cotton.

The DOHA round of trade negotiations continues to flounder. The National Cotton Council, according to its chairman, Arkansas producer Larry McClendon, is trying to avoid a “bad deal.”

“I hate to use a dramatic term like collapse, but it does not look like there will be an agreement by the end of the year,” said Scott, who explained no DOHA agreement would mean trade issues reverting back to being handled through bilateral and multilateral trade deals.

Fortunately, he added blame for the failure to get an agreement in the last DOHA round of talks can be put on India, which he said “asked for some very unreasonable things in pandering to its domestic industry. It is nice not to have the U.S. as the bad guy.”

Cotton will have a hard time holding U.S. acres because of demand for corn and soybeans. Scott predicts U.S. corn acreage will remain at about 90 million acres for the next few years. It spiked at 93 million due to robust rollout of the U.S. ethanol program. Ethanol will continue to be a major focus on the push to make the U.S. energy-sufficient. It is not an economic issue; it is political.

The debate over using corn for fuel or food comes down on the side of fuel. Taking ethanol out of the U.S. gasoline supply would result in a hike of 15 cents per gallon in gasoline prices. Using that same corn for food would decrease food prices 1 percent to 1.5 percent, according to Scott.

“As for the impact on the American consumer, it is a decent trade-off using corn for ethanol,” he suggested.

Scott also predicted the U.S. will produce about 75 million acres annually for the next several years.

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TAGS: Cotton
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