Like a game of limbo daring party guests to see just how low they can go, cotton prices are testing the economic agility of U.S. producers.
How low cotton prices have the potential to drop depends primarily on two factors, according to Don Shurley, agricultural economist with the University of Georgia in Tifton, Ga.
With cotton exports to China almost nonexistent at this point and U.S. textile mills decreasing production, Shurley says, the possibility exists for the price of cotton to continue its downward slide into the 30s. Exactly where prices will bottom out lies in the answer to the questions: Will U.S. producers make an 18- to 19-million-bale crop in 2001? And, can we increase our exports to the level needed to prevent cotton stocks from building further?
“The biggest concern I have revolves around what has happened in terms of our U.S. mill industry. In the last 3 or 4 years, we have lost almost 2 million bales worth of business in our U.S. mill industry, and we are at the point where our domestic mills are barely using 9 million bales of cotton each year,” Shurley says.
Adding to this, he says, is the fact that U.S. cotton producers are not adjusting their acreage downward despite this fall in demand. “Our cotton acreage is hanging kind of high because there aren't any other profitable options available, and with cotton, farmers can at least count on receiving a POP or loan deficiency payment (LDP). There is nothing else cotton producers can grow that can make them as much money as cotton.”
“We've got a situation where our supply of cotton is fairly constant and high, and our domestic mill industry is down the toilet,” he says.
These combined factors increase the U.S. cotton industry's dependency on foreign demand and exports, according to Shurley. “Without any ability to adjust on our acreage, we're going to have to have record or near-record exports every year to keep from building stocks. We're going to need 9 million bales of exports this coming year just to keep stocks level. If you look back, historically, we have never been able to export that amount of cotton without China being a major buyer. And right now, China is not a buyer of U.S. cotton.”
While China has traditionally been an important customer for the United States, cotton exports to China have not always maintained a dependable level of consistency from year to year. For example, despite the fact that many economists, including Shurley, believed China would be a fairly significant buyer of U.S. cotton this year that hasn't been the case.
Ongoing political tensions between the two countries are likely also playing a role in the evolving trade relationship between the United States and China. “We need to keep our eyes focused on the political tensions we seem to be having right now with China because our political relationship with China is very important to the status of our trade relationship with China,” Shurley says. “Normally, China is not a big customer of ours, but when they are in a mood to buy cotton, they have a history of coming to the United States to get it. And, with the amount of cotton we are dealing with right now, we've got to export cotton to China to keep from further building our stocks.”
The one unknown, other than China, which could reverse the downward pressure on cotton prices is the weather. Although a weather-related disaster is likely the last thing Mid-South cotton producers would wish on Southeast or Southwest growers, or vice-versa, that may be what's needed for cotton prices to rebound.
“So much of the outlook for cotton prices depends on what kind of year we have in terms of weather,” Shurley says. “With the acreage we've been growing the past few years we've had the potential to make an 18 million or 19 million bale crop each year, but weather conditions have kept us from doing it. If, in fact, this is the year that the weather cooperates, and we make a 19 million bale crop of cotton, then it's going to be extremely difficult to pull prices back to levels where farmers would like to see them.”
The good news is that although Shurley says the potential is there for cotton prices to drop into the 30- to 39 cent range, there is little likelihood they will stay there.
“Can we get into the 30s? I would hope not, but we've already come within 4- or 5 cents of it this year, so it's certainly not out of the question. If that does happen, however, history has shown us that cotton prices don't stay at that level for very long. Hopefully, supplies will drop just enough, or demand will pick up just enough, to pull us out of it,” he says. “The overriding issue is, can we improve from where we are and what is it going to take to do that.”