Cotton producers have had to look hard to find a silver lining in the dark clouds that have hung over their industry in recent months. And, even when they’ve found one, it’s likely to have sprung a leak.
Most growers are painfully aware that the 2008 crop was an expensive one to produce due, in part, to crude oil prices rising above $140 a barrel and sending retail gasoline and diesel prices soaring last spring. After farmers got their crops in, energy prices plummeted.
“One of the few bright spots in recent months has been the decline in energy prices,” said Gary Adams, vice president for economics and policy analysis at the National Cotton Council, noting crude oil prices have fallen back in the range of $1.30 per gallon, and diesel prices have declined to levels more in line with those of 2006 and 2007.
“Looking at 2009, the latest projections by the U.S. Department of Energy call for oil prices to stay near current levels. They project retail diesel prices in the range of $2.50 per gallon, which is quite a bit lower than current levels.”
The dark lining to that silver cloud is that polyester prices have also fallen as a result of the lower petroleum prices.
“Cotton continues to face strong competition from polyester,” says Adams, a speaker at the NCC’s Beltwide Cotton Conferences in San Antonio. “The situation differs somewhat across countries, as evidenced by data for China, India and Pakistan – which together account for two-thirds of mill use.”
In China, he said, internal policies and import controls have generally supported cotton prices at 120 percent to 130 percent of polyester prices, but, in recent weeks, a sharp decline in polyester prices has pushed the ratio above 160 percent.
Cotton and polyester prices in India are currently at similar levels, as exhibited by the roughly 1-to-1 price ratio of recent months. “However, this is a different picture than the previous two years when cotton prices were below polyester prices. In Pakistan, the relationship has been somewhat more stable, with cotton prices being 80 percent to 90 percent of polyester prices.”
On the brighter side, natural gas prices have followed crude oil prices and weakened in recent months, prompting the Department of Energy to forecast prices of around $6 per thousand cubic feet in 2009. (Natural gas prices peaked at $15 to $20 per thousand cubic feet during the winter and early spring in 2008.)
“While the relationship between natural gas and nitrogen fertilizer prices is not as strong as the relationship between crude oil and diesel, recent USDA data indicate that fertilizer prices are softening from the 2008 highs,” Adams said.
Trying to find an average is difficult for production areas as diverse as those found in the Cotton Belt, but the best estimate puts the average cost of purchased inputs for the 2008 production year at just under $500 per acre, a $65 increase above 2007 and more than $100 above 2006.
“For this year’s crop, current prices should provide some relief in costs,” Adams said. “While costs may not drop back to the 2006 level, a number in the range of 2007 or slightly lower seems very plausible.”
Lower oil and gasoline prices directly affect the price that ethanol plants are able to pay for corn as a feedstock for ethanol production. Separate research at Iowa State University and Purdue University indicate that at current oil prices, the break-even corn price for ethanol plants ranges between $2.50 and $3.50 per bushel.
“If current oil prices persist, as the Energy Department projections suggest, then grain prices will remain under pressure as well,” Adams notes. “This will be another factor that farmers must consider as they make this year’s planting decisions.”