What is in this article?:
- Calcot survives despite cotton marketing frenzy
- Financial struggle
- A series of domestic and global developments tied to record-setting U.S. cotton prices forced the California-based Calcot marketing cooperative into tight financial times this year;
“We survived and in the process paid out over $113 million across the spectrum of the Calcot membership,” said Jarral Neeper, Calcot president. “Never have so many obstacles been placed in the road in front of Calcot. Our co-op survived and we have actually become even stronger.”
Yet when cotton prices peaked, buyers stopped buying and prices fell. The value of unsold inventory fell rapidly. Calcot felt the heat and the company, like other cotton marketers, struggled to financially survive.
Neeper said futures contracts were sold and prices moved higher. Calcot was required to post funds to the future’s market. This money is eventually recovered by the physical sale but Calcot was faced with funding margin calls or liquidating positions.
“With the extreme rise in prices and higher margin limits, it seemed like we were sending incredible amounts of money to New York daily,” Neeper said. “It was not a pleasant experience.”
This difficulty caused Calcot to close its Call Pool and stopping the spot fixation programs for the 2011 season.
“We simply could not endure the financial burden at these levels despite the fact we were selling and shipping cotton as quickly as possible to alleviate the situation,” Neeper said. “We were not alone. Other marketers faced difficulties as well.”
Some competitors thought Calcot would fail.
“We survived and in the process paid out over $113 million across the spectrum of the Calcot membership,” Neeper said. “Never have so many obstacles been placed in the road in front of Calcot. Our co-op survived and we have actually become even stronger.”
Neeper likened Calcot’s tough year to the realities of professional football.
“Every season is different and everyone has the same goal to come out on top,” Neeper said. “Some years you might win the Super Bowl and some years you get the first pick in the draft after the worst win-loss record the previous year. Calcot had a season where we didn’t win the Super Bowl, but we made the playoffs. That’s not too shabby.”
Future cotton prices
Changing gears, Neeper peered into his crystal ball to predict short term cotton futures prices. He predicted a “murky” outlook for the 2011 market with Upland prices holding in the $1 range into the 2014 contract year.
Neeper’s market predictions are based on 2011 domestic and foreign cotton production, existing worldwide supply stocks, and the worldwide economy.
“The 2011 production year in the U.S. has been troublesome at best led by extreme drought in Texas,” Neeper said. “I don’t like using the word ‘disaster’ but nothing else seems to fit.”
The Texas High Plains has an extremely small cotton crop by Lone Star state standards. Neeper predicts Texas cotton production statewide could be half of the recent norm. Cotton growers in south Texas were blessed with several timely rains which made a crop, though not a record.
The Arizona cotton crop will pose marketing challenges for Calcot as the hottest August temperatures in history reduced some cotton quality. Weather could also be a factor in California where a cool spring delayed planting and crop development. Actual California cotton quality and quantity is yet to be determined.
The 2011 U.S. cotton crop is down at least 2.5 million bales from last year. Neeper says USDA’s 16.5 million bale forecast for the U.S. Cotton Belt is a tad high.
California cotton farmers will produce about 1.25 million cotton bales with Arizona production pegged at 800,000-bales plus; both higher than last year due to increased acreage.
Arkansas, Georgia, Mississippi, and North Carolina also will have increased production. Texas clearly will have a much smaller crop.
While U.S. cotton consumption stands at about 3.8 million bales, cotton marketers are focused on the export market. The outlook is not good.
“The world economic recovery has stagnated or gone backwards prompting a reduction in likely offtake (demand),” Neeper said. “We’ve seen weekly export cancellations for 22 of the last 29 reporting weeks.”
Compounding the bleak use reports, China and India have large cotton crops while farmers in Australia and Brazil produced record crops.
“When you put these factors together, global ending stocks will be nearly 20 percent higher than beginning 2011-2012 stocks,” Neeper said.
These factors are why cotton prices have fallen from recent unprecedented highs over the last year and a half.
“Unless we see a better economic recovery or some disaster in cotton production, prices will likely drop a bit, but I don’t think we’ll go back to the 50-cent/pound range,” Neeper said. “If this year taught us anything it’s that anything is clearly possible.”