California and Arizona cotton is like the heralded triple threat baseball player with a threat now missing.
Picking of the 2007-2008 California and Arizona cotton crop has begun. Both yield and quality should be good, according to Calcot President Bob Norris. Costly in-season insect and disease problems were non-existent.
Unfortunately, prices are the missing element that could make cotton the star of the game. They have been in the cellar almost as long as the Cleveland Indians.
Although Norris said there has been a recent, helpful “up tick” in prices from a four-year run of flat prices, he hopes they will go higher, much higher. “Upland cotton prices in the 80-cent range would help a lot” to put cotton back into the crop mix for U.S. Sunbelt farmers. Unfortunately, cotton prices have farther to climb than baseball's Indians, Norris told growers at four Calcot 80th annual meeting gatherings, three of which were held far from the cooperative's Bakersfield, Calif. headquarters.
Market fundamentals say cotton prices should be better. World production is estimated by USDA to be 117 million bales. Consumption is predicted to reach a record 128 million bales. U.S. exports are expected to return to about 16.7 million bales, “which would be good news indeed, especially if U.S. production is under 18 million bales,” said Norris.
U.S. production should be down, due to weather and a huge swing in acreage in the Mid South and Southeast from cotton to corn and soybeans.
“Despite large crops in China and India, we're expecting world stocks to be down by more than 5 million bales at the end of the season. Historically, that has led to higher prices,” Norris said. Now growers wait to see if history repeats itself.
Cotton has started to ride the all-commodity bullet train of big grower returns for corn, wheat, alfalfa and soybeans. However, now it is the caboose in California where cotton acreage this year is the lowest since World War II, with Pima taking over as the dominant cotton in the state. Without Pima, some wonder where the industry would be today.
Norris understands the economic switch to not only corn and alfalfa, but permanent crops as well. However, there are long-term consequences to these shifts. “We are giving up market share for customers who use SJV Acala,” including some who have been forced to shift yarn production mix to other varieties.
Sounding a little like the cruise director on the Titanic, Norris points out that corn, wheat and alfalfa are “at least … still row crops” that can be switched back to cotton if prices improve. Unfortunately, cotton has also lost out to trees and vines and the real estate boom in California's Central Valley. Growers will not tear out permanent crops and it is unlikely new homes will be torn down to plant cotton once again, making upturn from less than 500,000 acres this year to anywhere near the 1.6 million acres planted in 1979, the state's cotton acreage peak improbable.
This flurry of punches from a variety of more economically stout alternative crops is not the only thing hammering cotton.
Water may be the windmill uppercut not only for cotton but many ag crops in 2008.
Winter weather is always acknowledged as a big, out of control factor in the irrigated West. Farmers know they cannot do much about the weather. However, of more immediate concern is what Norris calls a “judicial drought,” specifically the federal court judge's ruling to protect Delta smelt that Norris says will have a major impact not only on agriculture, but residential areas as well.
“Any time you are looking at having water deliveries reduced by a third, that is not a positive development for California agriculture,” he added.
Another haymaker in the making is the new farm bill. The House has passed an “about as good as it's going to get” farm bill said Norris. Now cotton growers must wait for the Senate to act, and senators are “talking about something else altogether” different than the House passed.
Norris noted that the Senate is promising a farm bill by the end of the year, but what comes out of a House/Senate conference committee faces a presidential veto, if it does not “conform to Administration ideas.” Regardless of what finally comes out of Congress, it will be different than the current farm bill, Norris said.
The recent resignation of Secretary of Agriculture Mike Johanns only adds “another layer of complexity to this process.”
And finally, there are the World Trade Organization sucker punches. One already has landed and changed U.S. trade policy for cotton with other challenges likely and having a big effect on grower decisions.
Add it all up and Norris says “this will be one of the most challenging years we've have ever faced.” That comes from a man who is approaching 40 years as an employee of the West's largest marketing cooperative.
Nevertheless, Norris offered he is “relatively optimistic” about Calcot's future amid these challenges.
Calcot sold a little more than 830,000 bales last season for $319 million dollars, and Chairman Charles A. Fanucchi of Kern County, Calif., expects the handle to be about the same number of bales from for the 2007 crop.
As the SJV cotton acreage continues to decline, Calcot has gone elsewhere to collect more cotton to market.
“California growths are an important part of this business, especially Pima,” he noted. Since 1955 Calcot has marketed Arizona cotton.
Unlike California, Arizona cotton acreage has been relatively stable at about 180,000 acres for the past few years. Of late, Arizona has helped fill some of the gap of declining SJV production, noted Norris. However, Arizona cotton producers have struggled with profitability due to high production costs and soft market prices. This has precipitated a shift to more profitable corn and alfalfa. Higher wheat prices also are expected to pressure cotton acreage.
Calcot is now selling cotton from New Mexico and areas of South Texas and the Coastal Bend part of the state as well.
“Like the rising sun, the bright spot in our future is in the east because that's where the acres are. We've marketed cotton from South Texas these past two years and growers there are very excited we have become part of the landscape. Our market share should continue to grow,” he said. This past year Calcot secured Southwest Irrigated Growers (SWIG), broadening its grower base and cotton mix. “The transition and the response we've had from those growers and their gins has been very positive, and we plan to increase volume from these areas that continue to produce dependable volumes of quality cotton.
Last year the 830,000 bales Calcot marketed were divided among the areas Calcot now serves as follows: 40 percent California, which includes Southern California and Sacramento areas; 42 percent Arizona; 14 percent New Mexico and Far West Texas, and 5 percent South Texas.
“Our reaching out to the east does not mean we place any less emphasis on the interests of California's and Arizona's cotton growers, but it is an acceptance of the reality of today's production situation.”
The annual gatherings also are when producers learn of final settlements. Calcot's final settlement for the 2006-2007 marketing year that ended in August totaled $10.85 million dollars.
Some highlights of various grades and pools from the crop:
Calcot's Seasonal Pool for Upland cottons, for base grade SJV Acala, 31-3-36, the final settlement was 3.25 cents per pound, for a final price of nearly 71 cents, on SJV gin UD free terms.
“It's important to note our base grade is still a 31-3-36. We have not changed our base grade, unlike some competitors,” noted Norris. Premium cottons, such as the 21-2-39 SJV Acala, achieved a final price of 74.15 following a final settlement payment of 5.25 cents. California Upland cottons, middling base grade, 31-3-35, received a final payment of 4.55 cents and a final price of 65.50.
Roller-ginned Acala, where the base grade is 31-3-38, will final out at 78.40, following a final payment of 3.75 cents. Better grade 21-2-40 finished out the year at 81.65, with a 5.75 cent payment.
“The move towards roller-ginning on the Acalas has had some negative price impact on Pima cottons, which brings us to Seasonal Pool Pima, grade 2-2-46, settled at 99.05, and will receive a final payment of 5.05 cents,” explained Norris.
Payments for Sacramento Valley producers in all pools are similar to those for California Uplands
Top quality Desert Southwest (DSW)/Arizona-Southern California Upland cotton, grade 21-2-37 in the Seasonal Pool, finished the year over 62 cents per pound, on net terms, at 62.10 cents, with a final payment of 2.25 cents.
Benchmark DSW, grade 31-3-35, finished at over 60 cents per pound, following a season-ending payout of 1.25 cents per pound, at 60.60 cents.
Considering the cotton futures market traded much of the season between 48 and 56 cents per pound, Norris pronounced the results as “pretty good.” He noted the difficulty in marketing grower-members' Upland and Pima cottons in a “crowded marketplace, combined with the challenge of overcoming chronically low prices.”
Pima cotton had difficulty maintaining the grower target of $1 per pound. California growers planted record amounts of Pima acreage in 2006 and production was sufficient to pressure prices all year long. New Mexico and Texas combined have about 43,000 acres of Pima.
Subsequently, base grade 2-2-46 desert Pima finished the year at 93.45 cents per pound, and growers will receive a final payment of 3.05 cents per pound.
The 2006-2007 marketing year began with high expectations, Norris said, of larger U.S. exports than what finally came to pass. Early predictions had the U.S. exporting about 16 million bales. Final exports were about 13 million bales.
China was the culprit, he said, as the Asian giant was expected to import over 18 million bales and instead brought only about 10 million bales through its ports. That left U.S. bales and other producers chasing after a smaller pool of buyers, and unfortunately, led to very cheap pricing.
Despite world cotton demand exceeding production, prices struggled during the August 1 to July 31 marketing year. Previous world cotton stocks were more than sufficient to smooth the transition from one year to the next, and large crops in India, China and the U.S. all added to price pressure.
Cotton futures traded at about a third of their normal range in a more typical season.
Calcot advances for the 2007-2008 are again based on government loan levels, adjusted for qualities.
“While we've seen some futures price moves in a positive direction, prices are not that much above government loan, so it's prudent to keep our advance levels somewhat conservative and then make progress payments as soon as we possibly can. This is a practice we have followed for much of our 80-year history, and it is one of the chief reasons we are financially sound,” said Norris.
Calcot claims about 1,400 cotton producer members in California, Arizona, New Mexico, and Texas.