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Risk management centerpiece of new cotton survival strategy

The lines on the economist's future cotton price and consumption charts for the next eight years looked like a heart attack victim's EKG reading — flat as a tortilla run over by an 18-wheeler.

And one of the speakers for the Kings/Tulare counties winter cotton meeting in Hanford, Calif., discovered long forgotten pamphlets on diverticulitis and hemorrhoids in the pocket of the notebook he opened to jot down his thoughts for a talk on cotton marketing.

The pre-planting season meeting organized by University of California farm advisors Bruce Roberts (Kings County) and Steve Wright (Tulare) was more like a pain management conference than a cotton meeting, especially after California State University, Fresno (CSUF) economist Mechel (Mickey) Paggi told producers even the most optimistic forecasters do not expect cotton prices to return to mid-1990 levels for a decade — or until 2012.

Survival until then will depend on three things, according to Paggi, the new director of the Center for Agricultural Business at CSUF:

  • Top-notch management and marketing skills with emphasis on the latter.

  • Research and development and advances in new production technologies and cotton varieties.

  • Grower and industry involvement in domestic and international agricultural policy development that will allow U.S. producers to continue growing and marketing cotton until the market turnaround arrives.

In short, it is going to be a long CPR before the U.S. cotton industry can breathe on its own.

Exports brightest light

Paggi, who came to CSUF after serving as executive director of USDA's Commission on 21st Century Production Agriculture, told central San Joaquin Valley cotton growers that if there is a “bright” light it is projections that U.S. cotton exports will grow.

Historically, U.S. cotton has accounted for about 25 percent of world cotton exports. It reached almost 35 percent last year, the largest percentage since 1960/61.

USDA projects that that will not be sustained in the long run while the Food and Agricultural Policy Research Institute (FAPRI) is more optimistic the U.S. can hold or grow a bigger share of the world export market, said Paggi, who “hastened to add that it is an awful bright light.”

California, which now exports 75 percent of its annual crop, should be in a good position to benefit from any increases in export market share.

Losing proposition

Growth certainly will not come from domestic consumption, which has been in a four-year free-fall. Paggi said that it likely would level off to an annual consumption rate of eight million bales, about where it is now.

Short-term survival for U.S. cotton growers will depend solely on continued federal support. Without support levels like they are today, cotton production nationally is a minus $60 per acre losing proposition.

Paggi predicts the final farm bill will look not unlike the House version, but he added, “don't hold you breath” waiting for the Senate and House conference committee to reach a consensus.

However, he said there is pressure to come up with a bill by the middle of April when there is a risk the $73.5 billion to support American agriculture could go away.

The farm bill is the wild card hanging over producers Mark Borba of Riverdale, Steve Smith of Madera and Tony Oliveira of Lemoore. They know there will be something coming, but they also told fellow producers at the Hanford meeting that it would take more than that to stay afloat.

California producers have counted on high yields and superior quality to carry them for decades. That no longer can be the case, said Borba who said the 36.5-cent drop in the life of December 2001 futures represented a $500 per acre loss in income.

Before the marketing presentations started, producers were told of advances in precision agriculture that could reduce input costs or improve yields.

“We were told we can save $3, $5 or $7 per acre with new technology,” said Borba. “I am talking about needing to minimize a loss of $500 per acre.” And, no technology can cover that much ground.

‘Long and painful’

“Risk management can be a long and painful process,” admits Smith, who said farmers must take control of their own destiny by making hard decisions.

Supply and demand fundamentals were evident in last year's market free-fall, despite what analysts were saying, said Smith. “The hardest thing for a farmer to do is pull the trigger” and make marketing decisions to protect against the downside.

While California may lead the U.S. Cotton Belt in yields and quality, it lags behind in marketing prowess, according to Smith. “Growers get together in other parts of the country…discuss marketing and they have marketing clubs,” he added.

California producers gather as well in coffee shops to “compare notes, brag and lie,” said Borba, who added it's time be truthful with fellow producers and bankers.

Farmers do not understand today's marketing. “We used to call up and ask what the basis was on December futures and that was it in marketing our cotton.”

Now it is an alphabet soup of terms and marketing approaches few producers understand.

Risk management

Options and futures must lose their “speculation” moniker. Borba said they must be viewed as risk management tools by not only producers, but bankers as well.

Farmers are aided in making decisions by agronomists, entomologists, bankers and others. “If you have people telling you what you want to hear and not the truth, fire them,” said Oliveira, adding “and don't lie to yourself.”

“We need precision marketing just like we need precision farming,” said Oliveira.

Oliveira has concluded that at best he can anticipate grossing 70 cents per pound for Acala with loan deficiency payments and other elements of what he hopes is a federal farm program similar to what was in place in 2001, and 82 cents for Pima.

Oliveira said he would only plant fields capable of producing three-bale Pima or enough Acala to break even at 70 cents. “If you cannot do that, don't plant,” he said, adding there will be no California upland varieties on his farm with price prospects of only 55 to 60 cents per pound.

For those who thought 2001 posed a challenge, Borba reminded producers that December 2001 futures opened at 61 cents. This year December 2002 futures opened at 40 cents with only uncertainty about what the federal farm program would be.

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