Over the decades, Kelli Merritt – who farms the West Texas cotton acreage she grew up on -- has never seen the like of current drought conditions afflicting cropland and herds of cattle.
“We’ve had droughts before,” says Merritt, who also is President of CropMark Direct, which offers marketing services to cotton growers. However, “even when we’re in a drought, we can receive a rain at the right time and make a fair crop. So, I thought we still had a shot at making a crop (in 2011).
“That turned out not to be true and our dryland crop never had a chance.”
With one eye on a faltering crop and one on volatile cotton markets, Merritt recently spoke at the Southern Cotton Ginners Association in Little Rock. Shortly after the meeting, she talked with Farm Press about market expectations, foreign production numbers and the worsening situation for Texas producers. Among her comments:
On wearing several hats…
“I grew up on a farm here in West Texas and went to college thinking I’d never be back but to visit. As life would have it, I wound up running the family farm over the last 10 years, or so.
“Before actually running the farm, I was doing the marketing and hedging of our crops. It was through that work that I became a commodity broker and started a consulting business. We help growers with proper placement of hedges and cash marketing strategies.
“It was through working in the marketing field the realization hit that I didn’t know very much about the mills and merchant end of the cotton business. As I traveled to the countries that spin cotton and visited mills, I felt there were some niche markets available that, if we developed relationships and did things properly, it would” be viable.
“After traveling worldwide to spinning countries, I knew that I wanted to know more about spinners and how that information could help farmers and ginners meet the needs of mills better. I feel strongly that bridging the gap between farmers and mills can help farmers deliver a better product to the mills that spin their cotton.
“Historically, there has been a real disconnect between the farms that grow the cotton and the mills that spin it…and the storyis the same on the retail end.Retailers don’t know much about how cotton is grown and farmers don’t know much about what retailers want in a cotton product. Understanding more about the entire supply chain helps everybody in the chain.
“CropMark Direct has now been in business for three years. The 2011 crop will be our fourth crop to market.”
On the current growing season…
“I’ve never seen a year like this one. All spring, keeping an eye on weather patterns, forecasts said it would be exceptionally dry…
“The last rain we had here was in October of 2010 – three-quarters of an inch. That’s the last moisture of any sort we’ve had here. The entire South Plainsregion had good rains in July (of 2010)but it’s been very dry since that time.
“I farm 450 acres with drip-irrigation with my son-in-law, Lee Riggins. Earlier in the season, we thought ‘if we can just get that 450 acres up, there will be a rain somewhere to help it and we’ll be okay.’ In retrospect, I wish we hadn’t tried so hard to get the crop up.
“Typically, we average around three to 3.5 bales on the drip acreage. This year, we may make one bale, maybe 1.5 bales.”
On unprecedented drought…
“I’ve never seen a year with this sort of drought. I also run a herd of cows and we have stock tanks going dry that never have gone dry before. We’ve had to sell most of the herd because there’s no grass or water for them.
“It is incredibly dry here. I’ve never seen irrigated crops in the Texas High Plains look so poor. You can drive mile after mile and maybe a quarter of the fields look even halfway normal.
“Many irrigated farmers are having difficulties with wells pumping sand because they have the surges of water that come as a result of not having sufficient water levels. Many different practices are being used to finish the summer. The most drastic measure is just turning the water off.”
On abandoning crops…
“About 10 days ago, I finally gave up on my cotton. I’ve turned the irrigation water off.
“I’m not alone. There are a lot of farmers turning water off and saying ‘we can’t afford any more inputs.’
“Some people ask me how much off historical yields the irrigated crops are. I think they’ll be off at least a half (the normal yield). It could be more than that. It’s very hard to tell because when you do find a good crop, it looksvery good.
“August can be the month that makes a good crop give up, so it may be the month that puts the proverbial ‘straw that broke the camel’s back’ on some marginal crops.”
On how the markets look currently…
“We always say high prices will cure high prices faster than anything. That happened last year – the market overreached into extremely high prices because mills were buying cotton in panic mode.The frenzy that occurred last year was a result of the perfect storm of circumstances.
“As a result, we probably saw 2 to 3 percent of mill usage convert to some sort of manmade fibers. That conversion has helped out with the short cotton supply. When the panic began to subside and mills could step back before buying, the market made the extreme down move.
“According to the experts, we’re about two million bales short on what the U.S. crop can provide as far as existing sales. Going into the new crop there’s demand to help fulfill commitments and should help prices stabilize and go back up until it hopefully finds a trading range.”
On overseas cotton production…
“The big question is: are there any other 2011 weather markets that affect crops? China is always a big question mark – are we getting a correct picture? Are their projections way off? Will there be a big surprise from the Chinese?
“We keep hearing the Chinese reserves are empty and they’re looking to fill them back up. If true, that should help put a floor in and stabilize the market.
“India is also a question mark. Part of the reason the market ran up so high last year was that India banned all cotton exports. At that time, we were already in a short cotton situation and the ban caused a panic in the market. Right now, India is saying they’ll export as usual.
“By September, we’ll have an indication how the cotton market has handled the calamity in the financial markets during the first part of August. Overall, I’ve been pleased with how cotton has held up. Considering the other markets, I think cotton has done okay.
“I don’t look for cotton prices to move up sometime in September, although not nearly as high as they were last year. I’m an optimist and think cotton will climb above $1 and hover around there. The conservative marketer in me says ‘farmers need to set a floor around $1, if they get the opportunity.’ Use a combination of the options market and contracts to set a floor and take advantage of any up-moves.”
On the SCGA talk…
“At the SCGA I spoke about the supply chain and who determines what each link pays.
“This time last year, the mills would pay very high prices for cotton. That’s because they could sell their yarn at a very profitable rate. Retailers need to restock shelves. So, as the prices went up last fall, the mills weren’t concerned.
“Now, the situation is very different. Some mills have large stockpiles of yarn spun from expensive cotton. That means if they sell it in today’s market, they’ll take a loss.
“Typically, when the market is down as it is now, mills draw back and say ‘we’ll wait and see. If this turns out to be the bottom, we’ll buy some. If not, we’ll wait.’
“The mills still need to buy cotton and demand should rise in the next few months. The big question is how much demand.”
How long can they watch?
“That’s a very good question.
“Last year, we saw them wait too late believing there would be a pull-back. They ended up buying at 50 cents to 70 cents higher than they wanted to.
“Usually waiting pays off for the mills. That’s true if you look at it historically.
“I’ve said all summer that I thought in September, you’d see some demand creep back into the cotton market. I’m anxious to see how much and in what manner it comes back in. Therewon’t be the panic buying that was so prominent last year.”
Anything else?
“I’m curious, at the end of the year, what Texas’ production (will be). Today, the USDA said the state production will be 4.5 million bales. A lot of experts think the crop will be significantly smaller.
“I really hesitate to ever argue with USDA numbers, but I was really surprised to see them put 4.5 million bales in Texas. (A figure between) 3.75 (million) to 4 (million) seems more likely to me.”