Brazilian cotton farmers may be basking in the glow of their victory over the U.S. cotton program in the WTO, but any celebrations are being tempered by the grim price outlook for cotton.
"A lot of growers have not fixed their contracts for their 2004-05 crop," said Chris Ward, a cotton farmer from Rondonopolis in Mato Grosso, Brazil. "They have fixed costs, but they don’t have many sales on their books."
With prices seemingly stuck around 38 to 40 cents per pound, fob port or industry, when he spoke at the USDA Agricultural Outlook Forum in Washington, Ward said many Brazilian cotton producers are looking at the possibility of a 20-cent-per-pound cash loss when they sell cotton this year.
"This has been a difficult year for us," said Ward, a native of New Zealand who has been farming in Brazil for 28 years. He’s growing about 6,000 acres of cotton this season.
"Last November, our grower association put out a projected cost for this year of nearly $1,800 per hectare ($740 per acre) which was the highest of all time. We were looking at $1,400 to $1,450 per hectare last year, so it’s gone up $350."
Ward said input costs have typically been higher for cotton farmers in Brazil, but the decline in the value of the U.S. dollar has widened the gap. The exchange rate has decreased from 3 to 3.4 to 2.70 real to the dollar since last year.
Higher interest rates remain a problem for Brazil, which was plagued by inflation rates of 20 to 30 percent per year for many years (vs. the current rate of about 6 percent).
"Just this last week our central bank lifted the interbank interest rate — the prime rate, as you folks would say — to 18.75 percent per annum, which gives us the most expensive interest in the world," he noted. "An overdraft for a Brazilian farmer, if he doesn’t have some sort of pre-financing, can run 3.5 percent to 4.5 percent per month."
In 2003-04, Brazil produced 5.7 million bales of cotton and consumed 4.1 million bales, leaving almost 1.6 million bales for export.
Nearly 90 percent of Brazil’s cotton is produced in the Cerrados region, an area in the central and western parts of Brazil that encompasses what Ward calls Brazil’s "Midwest" states.
Until the 1970s, Brazil relied on its southern states for most of its primary crop production. But as those areas filled with people and farms and as land became more expensive, Brazil’s farming began shifting northward to the Cerrados region.
The Cerrados, the Brazilian word for savannah, contain about 530 million acres — about 25 percent of Brazil’s total national territory. From 60 to 70 percent of that 530 million acres could be used for agricultural and beef production. As with most savannah climates, the region receives most of its average rainfall in six months and is dry the other six.
The climate makes the Cerrados region ideal for cotton production, said Ward. Many farmers plant soybeans in November, harvest them in January and follow the beans with cotton in February — all during the rainy season. They harvest cotton during the dry season.
"We feel that we do have a long-term stability and a long-term future in cotton in Brazil for a number of reasons," he said. "First of all, our rainfall and climate tend to coincide with the cotton production cycle.
"Water is set to become a major commodity, and our ability to produce natural fibers with rainfall will give us an advantage over regions that have to rely on irrigation. And it generally does not rain in May, June and July when we are harvesting our crop, so that also gives us a certain amount of advantage."
But Brazil "loses out" compared to other countries when it comes to production costs, he said. Brazilian farmers enjoyed gross margins of $80 to $155 per acre, depending on yield, in 2003-04 when cotton prices were higher.
"Unfortunately, our costs this year have risen by more than 23 percent due to the fact that inputs have gone up. Farmers believe that the input manufacturers like the fertilizer people and the chemical people looked at our balance sheets and said we could afford a bit more this year."
With inputs rising and the revaluation of Brazil’s currency pushing costs to about $740 per acre this year, "if we don’t produce at least a three-bale crop it will be very difficult to be profitable with cotton this year."
The salvation for many of Brazil’s farmers since the mid-1990s has been the productivity increases in the Cerrados. "That’s how we’ve survived," said Ward. "We’ve had more losses than profits some years. But the main thing that has kept us in business is our productivity. We’ve lifted ourselves from about 1,400 pounds in the early 1990s to about 3,400 pounds of seed cotton for top growers last season."
Expect yield drop
Many farmers are anticipating a reduction in yields for this year’s crop. "We’ve had excessive rains in December and January," said Ward. "And we were delayed in planting because it took longer to get going because of the rain."
Because of the Cerrados climate, farmers can plant cotton or soybeans from early November into January. They can also plant cotton after soybeans when market prices warrant and take advantage of the nitrogen left behind by the soybean crop.
There are downsides to the longer planting window, however. "The Brazilian grower associations have put planting caps on planting dates because of the boll weevil eradication program being conducted in Mato Grosso," he said. "In Bahia, they are limiting planting to the end of February for the same reason."
Brazilian cotton farmers use mechanized harvesters and most other forms of technology, he said. "We do not manufacture cotton pickers; we have to import them all from the United States, but the rest of the cotton machinery is manufactured in-country."
Many growers have on-farm gins. "Some of these gins are 50 years old, having been manufactured in Brazil back in the 1950s. But farmers refurbished them and got them going again."
One of the biggest hurdles Brazilian cotton farmers face is transportation. "To get our cotton to the mills or ports from Mato Grosso, we have to ship it 1,000 to 1,300 miles," he said. "The newest expansion area for Brazilian cotton is in the state of Bahia, which is close to many of the textile mills."
Ward says many problems in the world cotton market could be solved by increased consumption. That’s especially true in Brazil where the domestic mill use of cotton has been relatively flat in the last 10 years.
Last year, synthetic fibers accounted for 25 percent of Brazil’s mill consumption with the remainder made up of cotton, wool and other natural fibers, he said. Cotton’s share of the market in 2003-04 was down about 3 percent from the previous year.
"We as an industry will have to make an effort to increase cotton consumption. This is a priority of the Mato Grosso Cotton Growers Association because we all know that in a country like Brazil you must increase the consumption of cotton if we are to remain in business."
Ward said he would talk about the subsidies issues "because I’m probably going to be asked about them." He said subsidies do distort the world market, as the Brazilian government claimed in its WTO case against the U.S. cotton program.
"But the main thing about them is that they don’t tend to finish up in the farm sector. In the long term, subsidies finish up in the hands of the non-farm sector of the economy. I understand the anguish in the world from the effect of subsidies and non-market influences on private production. And it’s something that we in the world are going to have to face."
The world’s cotton farmers will receive a greater return in the long term from promoting consumption "rather than fighting over other people’s products," he said.
"We’ve got to convince countries like those in Europe and Scandinavia and regions that have a lot more money in their pockets that they can do a lot more for rural development if they consume more of our product."