Outlook is threadbare for 2009 cotton crop
Posted on Sunday, December 21, 2008
The last two years have been tough for Arkansas cotton farmers.
Squeezed between low, relatively stagnant cotton prices and record-high production costs, many have shifted to other crops.
The 2009 outlook for cotton is no better, with the slumping global economy expected to erode world cotton demand by 5.5 percent from a year ago, the biggest such drop in 65 years, according to the U.S. Department of Agriculture.
Nowhere are cotton's prospects more grim than in the eastern Poinsett County town of Trumann, where 25 farmers still are owed more than $6.1 million for some of their 2008 cotton. That information is included in bankruptcy schedules filed last month by Paul Reinhart Inc., the nation's fourth largest cotton merchant.
"It's probably one of the most uncertain times I've seen in [agriculture] in a long time," said Marty White, a Trumann farmer who thought he had sold cotton to Reinhart for more than 80 cents a pound.
Instead, Reinhart filed for Chapter 11 protection and rejected its purchase contracts, leaving farmers with little choice but to put their cotton in the federal government's marketing-loan program. That program currently guarantees farmers 52 cents a pound for standard quality upland cotton, compared with 45.28 cents a pound Thursday for a March delivery contract on the Intercontinental Exchange in New York, commonly known as ICE Futures U.S.
Statewide, 97 Arkansas cotton farmers and gins are owed more than $25.5 million by Reinhart, according to the company's list of "creditors holding unsecured nonpriority claims."
Cotton's recent decline in Arkansas has been dramatic.
Just two years ago, the state's farmers harvested 1.16 million acres of cotton - the most since 1972 - and produced a record crop of 2.525 million 480-pound bales. In 2007, however, harvested acreage fell 27 percent to 850,000 acres. This year it dropped another 25 percent to 640,000 acres, leaving Arkansas in third place behind Texas and Georgia in terms of cotton production, according to the latest USDA estimate.
"Cotton acres will be down in our area for sure," said White, speaking of the 2009 growing season. "Every farmer I've talked to is cutting their acres back."
White, who began farming in 1975, grew cotton exclusively until seven or eight years ago, he said.
"Now we're down to 25 percent," White said, having diversified into corn, rice, soybeans and wheat.
Matt Moon, manager of Dixie Gin of Poinsett County Inc. in Trumann, also expects cotton acreage to decline in 2009.
"I think where you'll see cotton this coming year is on the very best land, where people are making 11, 12, 1300 pounds an acre. Other than that, I think you're going to see a lot less cotton," Moon said.
Last week, Memphis-based Informa Economics Inc. forecast that U.S. cotton-planted acreage would fall 19 percent next year to 7.65 million acres, the fewest since at least 1909 when the USDA began tracking planted cotton acreage.
Steve Scott, president of Little Rock-based Scott & Associates Agricultural Marketing Inc., attributes much of U.S. cotton's problems to the crop's increasing dependence on export sales.
"The major problem we've had was when we lost our eastern [textile] mills," Scott said. "Now we're in the export market and, frankly, we've become kind of a bit player."
Domestic use of cotton peaked in 1997, said Steve Mac-Donald, a senior economist with USDA's Economic Research Service who has followed cotton for the last 15 years.
As recently as 2000, U.S. cotton exports as a percent of production was 40 percent, MacDonald said. But that figure jumped to 54 percent in 2001, 75 percent in 2003 and reached 90 percent this year, he said.
"Now we're back to where we were in the 19th century," MacDonald said, when most U.S. cotton was exported to England to be made into cloth.
England consumed about 40 percent of the world's cotton then. Now China consumes about 40 percent of the world's cotton, he said.
Cotton is truly a global commodity. "More of it crosses international borders than wheat or corn or rice," MacDonald said.
Cotton consumption is also more sensitive to changes in income than food consumption is, he said. During economic downturns, people can rely on inventories of semi-durable goods like clothing, MacDonald said.
"You can wear a shirt for longer than you can hold onto a hamburger," he said.
COTTON ONCE KING
Cotton has played a pivotal role in Arkansas almost since the territory was organized in 1819, according to Donald Mc-Neilly, author of The Old South Frontier: Cotton Plantations and the Formation of Arkansas Society, 1819-1861, published in 2000 by the University of Arkansas Press.
By the 1850s, "Arkansas had matured into a culture and a society fully rooted in cotton and plantation slavery," McNeilly wrote.
In 1866, 489,000 acres of cotton were harvested statewide; by 1930, that number had grown to a record 3.498 million acres. Until 1966, cotton was "king" among Arkansas crops, consistently ranking first in terms of production value. But the crop faltered that year - falling to second place behind soybeans - and has never regained the No. 1 position.
In 1983, Arkansas' harvested cotton acreage fell to 290,000 acres, the fewest since the end of the Civil War. During the last decade, production has rebounded as yields have improved, thanks in large part to genetic engineering and bollweevil eradication.
One visible sign of ongoing change in the cotton industry has been the consolidation of ginning, the process of removing cottonseeds to prepare the fiber for sale to cotton buyers. In 2008, 54 cotton gins operated in 21 Arkansas counties, down from 91 gins 10 years ago. This year the average number of bales produced per gin fell to a six-year low of less than 24,500 bales.
Most Arkansas farmers won't decide until February or early March exactly how many acres of each crop they'll plant in 2009, said Gary Kinder, president and chief executive officer of Jonesboro-based Farm Credit Midsouth.
The price of each crop will end up "buying acres," Kinder said. "Farmers have to go with whatever crops earn the best net income."
Kinder expects cotton acreage to decline in 2009, replaced largely by soybeans or corn.
Cotton farmers have tended to specialize in the crop and have been reluctant to abandon it. But many farmers who diversified in previous years would be hard-pressed to return to cotton because it's so labor-intensive, said Tom Barber, cotton agronomist with the University of Arkansas Cooperative Extension Service.
Cotton requires much more pest and irrigation management than do grain and oilseed crops, Barber said. One result is that "cotton can generate more money for the community than any other crop," especially when processing at local gins is considered, he said.
Even gins, many of which are large landowners, have tended to release their renters from any obligation to grow cotton because they want those tenants to survive, Barber said.
"A lot of [farmers] still really want to grow cotton, but they can't go broke doing it, obviously," he said.
Scott Stiles, an Extension Service economist based in Jonesboro, worked with Barber to prepare 22 budgets for 2009 cotton production, which differ according to irrigation type, seed variety, tillage practices and technology fees. A typical budget indicates a variable production cost for cotton of $654.95 per acre, Stiles said.
"If you use a number like that, everybody's telling Tom Barber 'I can't afford to grow cotton,' and 'We're going to have maybe 300,000 acres of cotton in the state next year,' down 50 percent," he said.
When land rent - usually equal to one-quarter of the crop - and equipment expenses are added to variable costs, farmers say they would spend about $850 per acre to produce cotton, Stiles said. So, with an average yield of 1,000 pounds per acre, they would need to earn at least 85 cents a pound to break even.
"That's the 'magic number,'" nearly double the current cotton price, Stiles said.
"But things are changing, not so much the price of cotton but the cost of inputs," he said.
When the budgets were prepared in October, diesel fuel cost $2.60 per gallon and urea, a popular source of nitrogen, cost $600 per ton, he said. Now, urea is down to $375 a ton and off-road diesel costs about $1.70 a gallon.
"That gets the variable cost of cotton down to $588.57," a 10 percent reduction, Stiles said.
RISK MANAGEMENT
One lingering concern of many in the cotton industry relates to the circumstances that led to Reinhart's bankruptcy.
In early March, when cotton prices spiked to a 12-year high of 92.86 cents a pound, Reinhart was forced to cover millions of dollars in daily margin calls to protect its futures contracts. That led to an unprecedented liquidity crisis from which the company never fully recovered.
A margin call is a demand for more cash collateral when price movements depress the value of a futures contract.
Rogers Varner, president of Varner Brothers Inc., a Cleveland, Miss.-based cotton brokerage, believes the March spike in futures prices was a direct result of the discontinuation of floor trading for cotton on the ICE in New York.
"They decided to close the floor, because they thought that the per trade cost was too high and was an unnecessary expense," Varner said.
But with the shift to entirely electronic trading, after Feb. 29, "the ICE just simply destroyed a large part of the trust and efficiency in our market," he said.
Anonymous speculators briefly jumped into the market, buying massive amounts of cotton and driving futures prices so high that they no longer bore any relation to cotton prices in the cash market.
Nearly 10 months later, trading volumes for cotton futures contracts remain "way down," Varner said.
Problems with the futures market are a big reason why Montgomery, Ala.-based Weil Brothers-Cotton Inc. and Liverpool, England-based Weil Brothers & Stern Ltd. decided last month to quit trading cotton, he said.
"The Civil War was the biggest threat to the cotton market of all time ... up until now," Varner said.
Scott, the Little Rock agricultural marketing consultant, believes farmers will be forced to manage more of the price risk for their crops as more intermediaries like cotton merchants get out of the business.
"The only way that's going to happen will be for the [agriculture] lenders to step in" and provide farmers with the credit needed to operate in the futures market, he said.
Meanwhile, attorneys representing cotton farmers still owed money by Reinhart are optimistic.
During a mediation session last week, Reinhart agreed to a settlement that would "produce approximately 4 cents a pound or $19 a bale for all of the bales that had a fixed price," said Barry Ward of Memphis-based Glankler Brown PLLC.
However, for the plan to work, U.S. Bankruptcy Judge Harlin DeWayne Hale would have to rule that the interests of Reinhart's banks in the company's collateral are subordinate to those of farmers and ginners, who are unsecured creditors.
Ward and Randy Fishman, of Ballin, Ballin & Fishman P.C., also of Memphis, said they will argue that such subordination is appropriate given "egregious conduct" by the banks that violated federal regulations.
Ward and Fishman point out that two of Reinhart's banks - Wells Fargo & Co. and Bank of America Corp. - recently received $25 billion each from the federal government's Troubled Assets Relief Program.
Information for this article was contributed by Yi Tian of Bloomberg News.
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