PCG EMAIL SERVICES: WESTERNFARMPRESS.COM - Looking at bright side of troubling cotton industry

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Wed Sep 23 15:41:04 CDT 2015

WESTERNFARMPRESS.COM - Looking at bright side of troubling cotton industry


Harry Cline, Farm Press Editor Emeritus
Sun, 2015-09-20 18:18

The finest Acala Upland and Extra Long Staple (ELS) Pima cottons in the world are produced in California. Fiber buyers worldwide know them well as the finest cotton around for producing premium textiles.

However, factors far from the turn-rows are pressuring that enviable position to the point that even the most optimistic in the industry are admitting concern for the future of California cotton because acreage is disappearing faster than a spinning 4,000-rpm picker spindle.

Nevertheless, those at the recent annual gatherings of the Western Cotton Shippers Association (WCSA) and Supima in Coalinga, Calif. were enveloped in cautiously optimistic outlooks for Western cotton despite a disheartening list of challenges facing the row crop that was once king of the Western crops.

These challenges include:

    Four years of drought and a most uncertain economic and availability future for irrigation water, and unrelenting competition from other crops that offer many times the income potential of cotton at basically the same production costs;
    World cotton market competition from China where the government is sitting on 50 percent or more of the world's cotton carryover not just for one season, but every year for the past four years and for the foreseeable future;
    A Southern California dock strike that sent world cotton mills sourcing cotton outside the U.S.;
    The fallout from a massive world cotton overproduction four years ago fueled by pie-in-the sky prices that sent textile mills scurrying away from cotton to manmade fibers. And cotton has yet to recover its losses.

California Upland cotton acreage this year is a mere 46,000, down another 10,000 acres from last year, according to Kevin McDermott, WCSA president and vice president/senior manager of Jess Smith and Sons, cotton merchant based in Bakersfield, Calif.

It peaked in 1979 at 1.6 million acres of Upland cotton and was as much as 1 million acres just 18 years ago.

Half of the 2015 acreage is in Merced and Madera counties in the northern area of the San Joaquin Valley (SJV) cotton-growing region with only a smattering of acreage in the valley's other four southern counties.

SJV Acala quality

SJV Acala is still in demand worldwide for its high quality, but prices for it are held down by commodity futures prices locked in a 61 to 68-cent December futures range, largely due to a huge surplus of cotton in the hands of the Chinese government.

SJV Acala commands prices well above futures prices, the base from which premiums are calculated.

McDermott said SJV Acala production has fallen to below what he calls the "base" demand.

More and more gins are closing and concerns are growing that the industry infrastructure could be jeopardized.

Cotton good rotational crop

Nevertheless, growers want to keep cotton in the row crop mix because it is a good rotational crop with the likes of tomatoes and onions. However, those same growers cannot ignore the big economic upside to cotton's alternatives, including high value vegetables and especially permanent crops like almonds and pistachios.

Once those permanent crops take the cotton ground, it is lost forever for row crops.

For example, three tons of almonds per acre at $3 per pound can return $9,000 per acre while cotton would be less than $1,000 for the same acre. With limited water supplies, growers with permanent crops or vegetable crop contracts are also using available water for those crops.

Water top issue

"Water is the No. 1 issue for not only Pima, but water for all crops in the West," said Keith Deputy, outgoing chairman of Supima and an American Pima producer in the Mesilla Valley of southern New Mexico and far West Texas.

"We are all living with short water every day," said Deputy.

Bamboo curtain

When Upland prices reached $2 per pound, the world, including the world's largest cotton-growing country, China, planted wall-to-wall cotton.

When prices plummeted from the massive 2011 acres, the Chinese government's grower support program ended up with the government owning as many as 68 million bales, roughly half of any year's world production, 50 percent of annual mill use and half the carryover. China still owns 51 million bales.

McDermott calls that a "Bamboo Curtain" stifling Upland prices.

China tried to sell 4.4 million bales earlier in the year, pricing it well above the market in hopes of minimizing its mounting losses. There were takers for only 300,000 bales and sales were halted.

It was overpriced because China stands to be the "biggest loser" when that cotton is eventually sold, said McDermott. Plus the quality is questionable for those stocks.

"It will not spin like 51 million bales of cotton," McDermott said.

Fortunately, this large carryover is off the market until next July and McDermott is optimistic that will bolster world Upland prices.

World cotton consumption continues to grow - albeit slowly, and it has finally exceeded world supply for the first time in six years. However, it is nowhere near the 2006 levels. However, overall supplies remain high, he added.

Strong demand for SJV Acala

McDermott expects strong demand for high quality SJV Acala. Some, he said, will be "surprised by the strength of the market" for California saw ginned Acalas. Unfortunately, he added, he did not predict it would break out of that 61-68 cent range.

"At least there is good demand for high quality cotton" that is not sticky, nor contaminated.

American Pima, grown exclusively in California, Arizona, New Mexico, and Far West Texas faces some different challenges than Upland but many of the same. Pima has carved out an exclusive, Supima branded worldwide demand from mills, clothing brands, and retailers. It commands a premium roughly double the Upland price.

However, production has also been cut in half in recent years due to more profitable crops, especially in California where 90 percent of American Pima is grown. And water is the other major limiting factor that has contributed to a production decline from more than 800,000 bales to roughly half that this year, 432,000 bales.

California Pima

It has been a meteoric ride for California Pima. The ELS-type of cotton was not even grown in California until the 1990s.

"There appeared to be no stopping Pima in California, yet the severe drought in the West and Southwest has changed that" and people are wondering what the future holds for Pima in California and the U.S.

Introduction of the more lucrative Pima into California saved the state's cotton industry, and the added California production allowed Supima to mount an aggressive, successful marketing and branding program worldwide.

Growers have done well with Pima production. Yields for the last three years have produced three of the four highest average yields on record, yet Pima is in its fourth year of declining production, following a near record high production year of 851, 200 bales during the 2011-2012 crop.

Pima's dependable status

Nonetheless, Supima must move forward with its promotional efforts and the conviction that there will be adequate water supply in the future, said Deputy. He added that manufacturers, Supima brands, retailers and others "must not get the impression that Pima is an undependable commodity."

If that happens, Pima customers will quickly look elsewhere for an alternative if they fear American Pima will be in short supply or Supima will be short-lived in the marketplace.

Manufacturers want Supima and American Pima to continue to be successful.

In an interview with the New York Times on the plight of Pima, Joe Dixon, senior vice president for sourcing and production at Brooks Brothers, said the drought had not yet had an effect on the supply of Pima cotton needed for the company's products, including four million shirts a year.

Nor, he said, is the company contemplating reducing its Pima cotton use for environmental reasons.

"We want to use the best raw materials for our products," he said. "Supima is the finest. As long as it's available, we'll continue to buy it."

Marc Lewkowitz, Supima executive vice president, said the final bale count for this season may be closer to 400,000 bales due to weather and water issues. Despite the fact this year's production is smaller than the last five years, a good carryover of stocks will bring the total supply to a slightly larger total supply of 707,000 bales versus 695,000 bales last year.

Pima price pressure

Price pressure on Pima has been "rather heavy" due to weaker Upland cotton prices and larger differential between the two varieties. Prices have fallen about 41 cents per pound on the world market.

American Pima competes worldwide primarily with Egyptian and Chinese ELS styles and that is a major challenge. The governments in both countries regulate supplies and prices, and American growers must compete with those heavy government support programs that make those growths less expensive than Pima.

China is the largest single producer and consumer of ELS cotton in the world. Growers there are growing more under heavy government support. This means the Asian giant will import less, but it can still be a "meaningful market" for clean, high quality Pima, said Lewkowitz.

Egyptian cotton production is down 30 percent and American Pima may pick up what is lost to China with previous Egyptian sales to India and Pakistan, he said.

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