The U.S. cotton industry could produce 600,000 fewer tons of cottonseed in 2006 than in 2005 even though cotton farmers are expected to plant nearly 300,000 more acres of cotton this spring.
How can that be, you say? That's because analysts like Dale Gustafson of Citigroup/SmithBarney think cotton lint yields will move closer to trend line levels than in the past two seasons. Gustafson says the lower seed turnout of newer varieties could also continue to be a factor.
Normally, lower seed production would mean higher prices, but that may not be the case because of the supply/demand situation for other oilseeds, according to Gustafson, senior grain analyst for Citigroup Global Markets Inc.
Gustafson was one of three speakers who addressed the “Future Opportunities and Challenges for Cottonseed” at the Southern Cotton Ginners Association and Foundation annual meeting in Memphis on the eve of the Mid-South Farm and Gin Show. Mid-South ginners have been struggling with lower returns for cottonseed in recent years.
“U.S. cottonseed yields have been trending down,” he said, displaying a chart that showed cottonseed yields declining from an average of 818 pounds of seed per bale in 1981 to about 715 pounds per bale in 2005. “You can really see the impact of varietal changes in the last couple of years.”
The trend line average would put the national average for cottonseed yields at 720 pounds of seed per bale in the 2006-07 marketing year, he said.
Cotton lint yields, as the industry knows, have been trending up, reaching 850 pounds per acre nationwide in 2004 and 840 pounds per acre in 2005. Returning to the trend line average would put lint yields at 765 pounds per acre in 2006.
Citigroup Global Markets projects that U.S. cottonseed production will decline to 7.3 million tons in the 2006-07 marketing year, 684,000 tons less than in 2005-06 and 942,000 tons less than the 8.24 million tons in 2005-05.
“We will have to scale back crush to 3 million tons in 2006-07, compared to 3.25 million ton in 2005-06,” says Gustafson. “Exports will remain around 375,000 tons and feed/seed/residual use is expected to decline from 4.5 million tons to 4 million tons because of lower supplies.”
Cottonseed users are expected to carry 426,000 tons into the new marketing year, beginning Aug. 1.
Several factors are working against cottonseed prices moving higher because of the drop in supplies: Oil mills reportedly are bringing in more rapeseed from Canada and the surge in ethanol refining is making more corn by-product available for livestock feed.
“The potential for more outbreaks of avian influenza or bird flu is beginning to create problems for poultry in the European Union and Russia,” says Gustafson. “Those countries are cutting back on consumption of poultry. Pork prices are also coming down, hurting crushing margins for oilseeds.”
The Citigroup analyst said he expects cotton oil mills to crush 1.37 million tons of cottonseed meal in 2006-07, or about 100,000 tons less than in 2005-06. Domestic usage is projected to decline 100,000 tons from 1.38 million tons to 1.28 million tons and exports from 110,000 tons to 90,000 tons.
Cottonseed oil production could decline from 2005-06's 992 million pounds to 910 million pounds in 2006-07, with domestic use falling from 975 million pounds to 900 million and exports from 50 million to 40 million pounds.
Demand for vegetable oils is increasing, in part, because of rising demand for biodiesel. Citigroup believes that U.S. crushers could produce 140 million gallons of vegetable oil for biodiesel in 2006, an increase of about 100 million gallons from 2005.
Consumption of soybean oil, one of the primary components of biodiesel, is expected to jump by 600 million pounds as food processors continue their preference for cheaper vs. higher quality cooking oils.
“We're not looking for much help from the change in food labeling requirements,” said Gustafson. “Over the next six months, we expect consumers will stay with the products they prefer or with the cheaper oils.” (Cottonseed oil sells for about a 5-cent-per-pound premium to soybean oil.)
Adding to the woes for cottonseed crushers is the growing belief that South America will harvest another big soybean crop this year. The South American growing season started dry last fall, but recent rains have kept yields from going lower.
Citigroup Global Markets is projecting Brazil's production will reach 58 million metric tons in the 2005-06 marketing year, up 5 million metric tons from last year's drought-reduced season. Bigger crops in Argentina, Paraguay and other countries could push South American production to 104.6 million metric tons, up more than 6 million from 2004-05.
“The increased South American harvest will make it difficult for the United States to get exports running again,” said Gustafson. His projection has 2005-06 U.S. soybean exports at 910 million bushels or nearly 200 million less than in 2004-05.
The decline in exports and soybean meal use (from 99 million bushels to 71 million) could increase 2005-06 ending stocks by nearly 300 million bushels to 570 million bushels or 20.5 percent of total 2005-06 usage, according to the Citigroup estimate.
“Stocks are coming back up,” said Gustafson. “Normally, stocks at those levels would point to $4 soybeans, but that's not likely to happen because of the new commodity funds.”
Hedge funds, which are “all long,” have become a major force in the Chicago Board of Trade. “If you get enough funds taking a long position, they tend to cancel out some of the bearishness in the market. It's lifting the whole price structure. That could be true of cotton down the road.”