Concerns for U.S. cotton growers going into the 2014 growing season are many. Chief among them: an abundant Chinese cotton supply on market prices, pending changes to the Chinese government’s agriculture policies, how the new U.S. farm bill will be implemented and a pending trade deal.
All were covered in-depth at the early February annual National Cotton Council meeting in Washington, D.C., where “The Economic Outlook for U.S. Cotton 2014” report was released.
The high points of the report?
“I think the biggest question right now is what China has done and what they’re going to do going forward,” said Gary Adams, NCC vice president, Economic and Policy Analysis. “They’ve certainly had the biggest impact on world markets.
China has been stockpiling cotton for the last three years. “Now, they’re indicating they will change that policy for the 2014 crop, no longer build their cotton reserves, and look to support farmers with a target price program. Depending on the level they set, it could cause their production to decline some in 2014. That’s because a target price is unlikely to be as attractive as what the farmers have received under the support program.”
The question, said Adams, “is how the Chinese will handle those stocks that they’ve accumulated. The concern for U.S. farmers is the recent reliance on China’s imports. For 2014, it’s difficult to see China continuing to import as much cotton as they have been.
“That will mean a very competitive market for the U.S., which annually exports 70 percent, or so, of its crop.”
Asked if there any indication why the Chinese have been stockpiling so much cotton, Adams pointed to several things.
“One of them goes back to 2010 when China had very little in the way of cotton stocks. Late 2010 into early 2011, cotton prices started to move much higher. It went above $2 per pound and China didn’t have the reserves to buffer their textile industry from the price run-up.
“A second consideration of the Chinese was to provide support to their cotton farmers. They decided that Chinese-produced cotton would be purchased at a high price, go straight into reserves and thus build up a buffer.”
Adams doesn’t believe the Chinese “anticipated that when the world price went below their level of support, all their cotton would be going into reserves. They are having a difficult time disposing of that cotton. I think that it’s now a larger amount of cotton than they originally anticipated.”
Does Adams anticipate that U.S. farmers may know what the Chinese plans are by planting season?
“We may have some indication by late March as to what the Chinese target price mechanism will be. I don’t know that we’ll have a lot of information about how they plan to manage their stocks for the new crop year. That continues to cause uncertainty in the markets.
“So, we may know a little bit by the time farmers decide on planting decisions. But I’m not sure the Chinese even fully know what they intend to do.”
New trade deal?
Queried on the potential effects of a Trans-Pacific Partnership deal on U.S. cotton, Adams admitted some concern. “That is an important issue we’re watching. The big question there is what affect it will have on the U.S. textile industry, which still consumes a bit over 3.5 million bales of our production every year.
“Vietnam is one of the countries participating in the Trans-Pacific Partnership. We’re very concerned with the amount of access to the U.S. retail market that Vietnam might get under more relaxed import restrictions.
“We continue to push for what we call the ‘rule-of-origin’ and that the TPP is consistent with NAFTA. That will provide some restraints on the access granted to Vietnam. Without that rule, it will have a negative effect on not only the U.S. textile industry but also the textile industries in other Western Hemisphere countries that are major customers of U.S. cotton and cotton yarn.
“Again, the key is whether a rule of origin will provide the U.S. textile industry some protection.”
Regarding the new farm bill, STAX, and coming programs, Adams said there will be “several enhancements to insurance products available to cotton producers. Those will begin in 2015.
“One of them will be called ‘STAX’ that is designed to be a revenue insurance product that producers can buy to cover the portion of income between 70 and 90 percent — the upper level of risk. Some people prefer to think of it as ‘shallow loss’ insurance.”
The Supplemental Coverage Option (SCO) is a similar concept and could be an alternative for some producers.
“Regardless, risk management is what producers will be looking at in the way of support and to provide a safety net for cotton.
“It is the case that this is a major change because going forward direct payments and counter-cyclical payments that we became accustomed to under past farm bills will be discontinued. Part of that was due to the pressures we faced in trying to resolve the long-standing WTO dispute (with Brazil).”
Adams said the other provision that cotton farmers need to be aware of “is the 2014 transition program since STAX starts in 2015. This year, cotton farmers will bridge the gap through a transition payment that will be based on their 2013 base acres and payment yield.”
As for the U.S./Brazil WTO dispute, has Adams heard any news on the direction the Brazilians are leaning in terms of trade retaliation? The Brazilian government has said a decision will be made in late February.
The Brazilians “have been in the process over the last couple of months (deciding) whether they want to initiate trade retaliation.
“We understand they’re still evaluating provision of the new farm bill and also considering their interpretation of provisions. There are meetings scheduled by the Brazilian government for later (in February) so my guess is they haven’t made any formal, or informal, decisions yet. We’ll just have to wait for that.”
Are the USDA payments that Brazil was getting scheduled to begin again?
“We haven’t seen any indication that will happen,” said Adams. “Those were stopped in October with (Agriculture) Secretary Vilsack citing a lack of authority to continue into the new fiscal year.
“To this point, that has not changed. Brazil will likely raise that issue during the discussions between the U.S. and Brazilian governments as they try to reach a resolution of the case.”