U.S. cotton farmers face a large carryover from the 2006-2007 marketing year, reduced exports, static prices, and uncertainty from both WTO and a farm bill debate as they approach planting season.
But they also have reason for some optimism with increased world demand, an improving yield trend and potential for a better export market in 2008, according to Gary Adams, National Cotton Council vice president for economics and policy analysis.
Adams and other industry observers outlined expectations for the coming year during the recent NCC annual meeting in Austin.
Adams said cotton exports from the United States for the 2006-2007 marketing year will drop significantly from last year. “At this point, a best-case scenario is between 14 and 14.5 million bales,” he said. Adding that to a5 million-bales consumed by the U.S. textile mills results in a 19.47-million-bale offtake from the 2006-2007 crop, 3.9 million bales less than last year. Ending stocks could be more than 8 million bales, highest since 1985.
One reason for high carryover, Adams said, comes from a bit of good news. Despite less than ideal conditions, U.S. cotton farmers produced the third largest crop on record, lagging behind only 2004 and 2005.
Adams said better varieties, better management and success of the boll weevil eradication program contribute to grower success. Average yield for 2006 was 819 pounds per acre. High yields, Adams said, helped offset some of the near record production costs producers faced in 2006, primarily from energy for irrigation and increased fertilizer prices.
Adams said growing demand for cotton creates reason for optimism. China leads the way in increased processing, he said. Mill use in China has reached 50 million bales with increases in retail demand by Chinese consumers and growing textile exports.
Adams expects U.S. exports to rebound in 2007-2008. The council expects U.S. sales to get back to 16.22 million bales. Offtake in 2007 should increase to 20.74 million bales, even with more pressure from Asian imports that could lower U.S. mill use to 4.52 million bales.
Relying on international markets for such a high percentage of the market comes with challenges in an increasingly competitive atmosphere, Adams said. The 2006 crop is the first of the post Step 2 era. “The impact on exports has been evident. Through mid-January, export commitments of upland cotton totals roughly 6 million bales. This time a year ago, total commitments had surpassed 10 million bales.”
World mill use of cotton will be near 121 million bales from the 2006 marketing year. Observers expect mill use will increase to 124 million bales in 2007.
Reduced acreage expected in 2007, precipitated by better prices for competing crops, should mean a crop below demand. “Further declines in world stocks are expected in 2007,” Adams said.
Grain will take acreage from U.S. cotton. Adams said grain and soybean prices are trading 30 percent to 50 percent above last year. Cotton prices are mostly unchanged.
The annual NCC acreage survey shows a 2.07 million-acre reduction in cotton acreage, 13.9 percent. The Southeast and Mid-South will cut upland cotton acreage by 20 percent. The Southwest and Far West will cut less and declining upland acres in the Far West will be partially replaced by long staple cotton. Pima acreage could jump by 11 percent.
The final arbiter of U.S. cotton production will be weather. Adams said a 20-million- to 21-million-bale U.S. crop is possible with good weather during the growing season. That level would be in line with anticipated offtake and would leave U.S. stocks unchanged by the end of the 2007 marketing year.
The farm bill debate beginning in Washington and continuing pressure from WTO will have little effect on the 2007 crop. But uncertainty about trade and policy adds to investment risks.
Craig Brown, NCC vice president for producer affairs, speaking to a Texas Cotton Producers Association session during the NCC annual meeting, said farm bill recommendations made recently by the secretary of Agriculture include items of concern to the cotton industry. “But it's important to understand that it's not our intention to criticize the administration's proposals but to determine what the National Cotton Council needs and put that into the mix. We'll see what role the president's proposal has.”
Scott Graves, legislative assistant to Representative Mike Conaway, R-Texas, addressing the National Cotton Ginners Association, said Conaway will rely on the National Cotton Council and other organizations to help focus the farm bill debate.
“We have concerns with the president's proposal, however. Payment limits and means testing are serious concerns.”
He said the means test cap, $200,000, is not so much the issue as is the idea of adding any means test. “A means test puts us on a path that we really don't want to go down,” Graves said. “That puts us in the position of getting away from agriculture support to income support. We have to be cautious about that. The farm bill has to remain an agriculture support program. We don't want an income support program to slip in.”
Graves said the secretary's proposal is “only a proposal. Congress will draft policy and direct funding.”
Graves also praised new ag committee leadership. “Representative Petersen has been great to work with. It's been very bi-partisan.”
Graves said Petersen plans to use subcommittees to pull together various segments of the farm bill and have a final bill ready to go to the full House of Representatives before the August recess. “He hopes to have the bill on the president's desk by Sept. 30.”
A recent minimum wage hike, Graves said, will be less harsh because of an $8-billion tax credit for small businesses included in the legislation. “That should be reassuring.”
He said immigration reform also will be important to this Congress. “We need a guest worker program,” he said. “Representative Conaway is supportive of immigration reform and for getting the workers you need.”