Mid-South farmers are finally seeing the price advantage in producing a crop for a big, strong domestic market. While the crop is corn and the market is ethanol, the expected shift out of cotton into grains could be a good thing for cotton prices, a Memphis cotton merchant says.
Joe Nicosia, chief executive officer of Allenberg Cotton Co., told an audience at the Mid-South Farm and Gin Show in Memphis that high prices for grains and soybeans, fueled by demand for alternative fuels, “is a new revolution. It doesn't matter what you grow — corn, oilseeds, beans or cotton — they're all going to be affected by the energy agriculture conversion that is taking place.”
The ethanol boom, along with help from mandates in Washington for alternative fuels and energy security, has doubled corn prices over the last nine months. Meanwhile cotton prices “haven't been too dynamic,” Nicosia said of cotton's long run of sideways prices. “You can imagine the stress this is putting on the system. Cotton producers live it every day, so they know what is happening.”
Nicosia doesn't believe ethanol demand is going away anytime soon. “As long as the U.S. government keeps subsidizing ethanol, the growth opportunities are enormous. The amount of ethanol to be produced versus other petroleum products is just a drop in the bucket.”
It's been a long time since Mid-South producers have enjoyed a boom in demand this close to home. “About 80 percent of corn demand is coming from the domestic market,” Nicosia said. “Those implications will spread across the world, but nowhere will it be felt as great as it will here in the United States.”
Nicosia noted that most foreign cotton-producing countries are not climbing on the ethanol bandwagon. Some simply don't have the inclination, while others can't grow an alternative crop. For example, “parts of Pakistan and India can reach 120 degrees,” which limits their crop options. “And in China, the government, which has to feed a lot of people, is very concerned about converting food into energy. The last thing they want to do is run short on food to feed their people.”
Nicosia noted that in the United States, the marketplace “is looking for roughly 10 million more acres of corn to be planted this year. To do that, you have to have a price response. Today, we have corn at over $4 and beans over $8.”
Two other factors that have contributed to cotton's lackluster price performance are the loss of the Step 2 program and the phenomenal increase in U.S. yields. “Before 2004, yields bounced around,” Nicosia said. “In 2004, we saw a dramatic spike. The projections for the 2005 crop were substantially lower because people didn't believe we'd maintain those yield increases. But we have.”
The excess cotton produced had somewhere to go for a while, “but today, we're struggling.”
Nicosia noted that in 2004-05, “our most important customer was China. We had 50 percent of its market share for raw cotton. The next year, we had 47 percent. Going into August at the end of Step 2, we took 69 percent of the market share.”
Post Step 2 has been a different story, however. “In September, it dropped to 41 percent, then 24 percent in October and November and to 16 percent in December. USDA and the budget office said the loss of Step 2 would be minimal, with the loss of 250,000 bales. Merchants and cotton shippers who defended the program said the loss would be 1.7 million bales at a cost of $800 million.
“Today, we're finding that our exports are going to go down roughly 4 million bales from last year.”
As a result, U.S. carryout has grown from 4.7 million bales estimated by USDA in August 2006 to 8.3 million bales estimated in February. Exports have dropped from 16.2 million bales to 14.5 million bales. The carryout “is a substantial quantity of cotton to be leftover at the end of the year.”
Nicosia's company paints even more bearish numbers for 2006. “We believe exports are going to drop to around 13.3 million bales and our ending stocks are going to balloon to 9.4 million bales.”
For 2007-08, with the economics favoring corn, producers in the Mid-South and Southeast will be called upon by the market to grow corn, soybeans and wheat. “They have choices. They can respond to price.”
This will result in an overall decline in cotton acres to around 12.5 million acres,” Nicosia projects, with big acreage losses expected in the Mid-South, 27 percent, and the Southeast, 22 percent.
This should produce a cotton crop for 2007-08 of around 19 million bales. With exports of around 17 million bales, Nicosia expects ending stocks declining to 6.7 million bales, which is still fairly substantial.
“But don't get discouraged. Be patient. Cotton will be invited to the party. We need one year of this acreage switch to bring stocks down to levels where price will have to rise to protect production.”