Understanding the Climate to Help Mitigate Risk on the Farm

Whether it’s El Niño, La Niña, drought, or flood, the climate/weather has a lot to do with how things turn out on the farm. While there are many sources to get current local weather data and future forecast, there hasn’t been too many sources available to farmers who want information regarding the climate and it’s affects on farming. Now there is a new source available at GaClimate.org. This is a new website “dedicated to providing timely weather and climate information to Georgia’s agricultural producers and county agents.” The GaClimate.org site has lots of useful information to help producers understand what the expected conditions will be like for the crop year as well as predictions about the future of the Georgia climate. Some of the resources are very basic, like the linked AgroClimate article explaining the difference between the climate and weather. Other articles are a little more technical but still easy to read, such as understanding soil temperatures for crabgrass control and the effects temperature has on wheat production worldwide.

Most farmers traditionally haven’t looked or thought about studying or understanding the climate because the current or immediate weather forecast are what matters to us this crop year. Every farmer has some method to check the weather for the next 7 days to help in planting/spraying/harvesting decisions (GaClimate has these tools also). But understanding how the climate operates and what the future holds can really help mitigate some risk in the future. For example, if all the climate models are predicting multi-year droughts in the future, then investing in more irrigation may be a very good idea. If you farm in some bottom land that doesn’t drain very well and there are climate predictions of more frequent large/heavy rainfall events, then you may not want to waste money on irrigation units for those fields that you will not need. Whatever the case may be, there is definitely some value in understanding the climate and its affects on agriculture to help farmers mitigate risk in the future.

2015 Cotton Market: Part 3, Turkey

In our final short series on the current cotton market we will discuss Turkey. As mentioned in the previous two blogs both China and India have support programs for their domestic production that hurts US cotton farmers. The Turkish situation is a lot different. Turkey only produces a small amount of cotton and must import about half of the cotton their mill industry needs. Behind China, Turkey is the largest customer for US grown cotton. Below is a chart showing US exports of raw cotton in thousands of 480lb bales from the last 6 years.

As you can see Turkey is the second largest buyer of US cotton behind China. The recent anti-dumping investigation by the Turkish government has caused major concerns about the future of US exports to Turkey. There doesn’t seem to be much factual evidence or price data to suggest that US cotton exporters are dumping cotton (selling below world price or undercutting others to hurt the domestic suppliers) into Turkey. Without any data suggesting why an anti-dumping investigation has occurred, the US cotton industry’s best guess is that this is a politically motivated case. Just prior to the anti-dumping investigation, the US issued its own investigation into steel pipe imports from Turkey, so it seems the cotton case is retaliation for the steel pipe case. Whatever the reason, the situation isn’t good for the US cotton farmer or the Turkish textile industry who has complained to the government that they didn’t ask for an investigation.

Going back to the importance of the Turkish market to the US cotton farmer, the below two graphs show how important Turkey has become this last year.

In 2013 Turkey accounted for 14% of total US cotton exports with China accounting for 39%. The reversal of China’s cotton policy and thus the lowering of imports by China in 2014 shows their share of US cotton exports in 2014 at 25% while Turkey’s rose to 19%. I think the numbers speak for themselves in showing how important the Turkish market is to the US cotton farmer. Hopefully this investigation will be resolved without in long-term affects on the US cotton export market.

2015 Cotton Market: Part 2, India

Much like Chinese cotton program that we discussed last week, India also has a program that supports their farmers at prices above the current world price. Before I dive deeper into that situation, it must be noted that both China and India have programs that pay farmers based on their planted acreage. This is very different than the majority of US farm programs that pay farmers based on historical or “base” acres. For the discussion and short example below, this understanding is critical to understand how both China and India’s policies affect the current market.

India actually has it’s own company within its government to manage their cotton industry. The Cotton Corporation of India (CCI), not to be confused with Cotton Council International (CCI) – the US cotton industry’s export promotion arm, was established in 1970 to help manage the flow of cotton through and out of India, and to help support the price by buying cotton. The basic mechanism that CCI uses to accomplish this task is their Minimum Support Price (MSP) program. This is an old target price program that triggers CCI to buy cotton from Indian farmers when their internal price of cotton, which is generally close to the world price, falls below the MSP. The current MSP translates to about 70 cents/lb. Since the world price was in the 60s most of the 2014 harvest season, CCI bought a good bit of cotton. CCI has no limit to how much cotton they will buy and they have no set standard as to when they sell cotton. Since this program pays the Indian farmer for they cotton they grew that season, there is no incentive for the farmer to not grow cotton the next season since they know CCI will purchase it at 70 cents, assuming the farmer can break even at 70 cents. From some news sources, it seems like 70 cents may not be the break even point for some Indian farmers as they have been voicing their concerns to the Indian government. As long as the MSP is in place at a price above the world market, Indian farmers will keep producing regardless of the world price because they are guaranteed the MSP for their cotton.

As you can see from the above example graph of the world supply and demand for cotton, the current MSP (70 cents) is above the world price (65 cents) by 5 cents. This causes the Indian farmer to not be responsive to price and therefore will over produce cotton under this program. This over production can be seen as the difference in bales between where the red line (MSP) crosses the green line (supply) and where the red line crosses the blue line (demand); this difference is about 10 million bales in this example. Again, this is a rough example but it shows how farmers in other parts of the world suffer from lower prices while the Indian farmer is protected at a price above the current world price. Couple this with the Chinese cotton program discussed last week and everyone should be able to see why there is a 100+ million bales of cotton in storage around the world.

The tricky thing with CCI’s MSP program is they there is no formula for when they sell cotton. It seems that they watch the market but sell at random. The market was actually going down a few weeks ago and they sold. That sell was at a level lower than the MSP, so CCI lost money on that sell. It would seem that they are waiting to sell the bulk of their cotton in storage once price gets close to the MSP, but no one really knows except CCI because there is no published formula on how they sell cotton.

One final note. As mentioned earlier both the Chinese and Indian cotton programs pay their producers on their planted acres for that year. This may seem like a logical practice but as shown above and discussed last week, it causes a farmer to not be price responsive to the market and continue to produce when farmers should be growing less of that commodity. The US’s long standing base acre payment practice is a good example of a program that helps farmers when times are tough but still allows them to reduce acres to help the supply/demand equation settle out. Some argue otherwise, but the data on cotton price and cotton acres planted in the US suggest that even though we have had program to help US cotton producers, acres still decline when cotton prices fall.

2015 Cotton Market: Part 1, China

As promised, we will do a short series on the current market situation for the Georgia cotton farmer. The first and biggest factor in the current market is China.

In early 2011 the Chinese government announce it would start buying cotton for its “state reserve” program. Some say that China did this because they feared they would run out of cotton for their domestic cotton mills to spin into yarn. This may be true but I think the situation is a little more complex than a supply and demand issue at the mill level. It seems to be more of a political issue. China has seen tremendous growth in it’s economy in the last 20 years. Much like the US in the post WWII phase, many new industrial sectors have grown in China since the early 1990s. Most of these factory jobs require cheap labor, labor that sometimes attracts farmers from rural China to move to the city for work (similar to US in 1950s and 1960s). This, I think, put some political pressure on the Chinese government to do something for their farmers who were getting older and couldn’t find the young labor to help or take over their farms because they had sought a more prosperous job in the city. Couple this with what they thought was a low 70-80 cent price, and a buying and storing program may not seem like a bad idea. The program should bump price up enough to make rural Chinese cotton farmers economically viable and attract more younger folks to stay on the farm as well as create a steady supply of cotton to the local Chinese cotton spinning mills. Seems like a good solution to a complex problem. This isn’t unlike many other programs of the past; for example the US grain buying/storage policy of the 1970s and the very recent Thailand rice buying/storage program which ended in early 2014.

The problem with any buying and storing program is that it artificially effects supply, either by storing and reducing supply or by selling it and expanding supply. This makes any commodity market more volatile and makes it almost impossible to predict a local price for the foreseeable future. That is exactly what happened when China started buying and storing cotton in 2011, the market went to record highs and it came crashing down to near record lows when they stopped buying and started selling in the spring of 2014.

This rapid run-up in prices and the huge volatility that has been introduced along with it was actually good for the Georgia cotton farmer in the short-run. The 2011-13 crop years saw great cotton prices mainly because we had a great export market wide open in China since their mills were having a hard time buying cotton (the govt. program guaranteed about $1.47/lb, so almost all of the local cotton was bought by the govt. and not mills). Because the cotton mills were paying higher than average prices and could not guarantee a future supply, many started spinning less cotton and more MMF (man-made fiber). This was purely an economic decision for the mills since they could get MMF for about half of the cost of cotton. I do not believe, as some suggest, that mills are using more cotton because of more people demanding cloths from MMF. I think the clothing demand stemmed from the high cost of cotton and the move by mills and clothing manufacturers to blend more MMF into their cotton products. I think this is called supply-side economics. The technology in MMF is hard to compete with and many consumers don’t even know that their favorite dress shirt or favorite blue jeans are not 100% cotton. Now that these products are a mainstay, it will be extremely difficult for cotton to make a huge comeback unless the price was very low.

Well, now that the Chinese government isn’t buying cotton, and the Chinese mills have an ample supply of cotton, cotton prices are very low. Low enough to compete with MMF. So from the mill and textile side of the business, there are some incentives to spin more cotton. Only time will tell if this actually happens.

In the meantime, because of the glut of cotton in storage it doesn’t appear that we will see high prices this crop year. There is just too much cotton sitting in warehouses (mainly in China, about 60 million bales, but another 30 million bales in the rest of the world). The one bright spot is that high quality cotton is in good demand. It appears that most of the cotton being “auctioned” by the Chinese government to the Chinese mills is of lower quality. Partly this is due to the fact that some of the cotton they have in storage is from the 2010 crop and partly because most of their cotton reserves are hand-picked Chinese grown cotton, which typically isn’t as high of quality as US machine-harvested cotton. This weird situation of having too much cotton in the world but exporting record amounts of bales should pull price up. But the fact that there are still around 60 million bales in Chinese storage doesn’t really put much pressure on the market for it to go way up anytime soon.

Looking forward China should actually reduce it’s cotton acreage in the short-term and probably increase its acres over time. I failed to mention earlier that the new Chinese policy is no longer buying and storing cotton at $1.47, but it will pay a producer the difference between $1.40 and the current market price for growers in the western region of China. Growers in select eastern regions get a direct 14 cent/lb payment. Most of the cotton in China is grown in the eastern region on small plots by hand. Western China has some mechanization and has the potential to expand machine-harvested cotton acreage. Data is sparse and probably very rough, but I’ve heard Chinese cotton production is about 60% in the eastern region and about 40% in the western region. The eastern regions of the country are home to the majority of the population. As mentioned earlier, China has been growing rapidly in the last 20+ years. Now they actually have a middle class that demands more than just rice and fish for meals. The new government policies are encouraging growers in the eastern region to grow more grain, mainly to feed their growing livestock industry but also to feed their growing middle class. The high target price program instituted only in the western region is a good indication that the government of China would like to see more cotton grown in the west and less in the east. This transition will temporarily reduce acreage, but if they policy is still in place in 3-5 years I could see China outpacing India and becoming the worlds largest cotton producer again.

Therefore, it is imperative that a Georgia cotton grower understands the situation in China and understand how this is affecting the market. The National Cotton Council has been meeting with the US Trade Representative’s office for years now trying to explain this so that the USTR can bring this up to the World Trade Organization (WTO). China’s policy has not only affected the Georgia cotton farmer, but cotton farmers all over the world minus China. We were very happy the Sen. Johnny Isakson brought up this important issue at a recent Senate Trade Committee hearing.

2015 Annual Meeting a Success

Until Wednesday January 28th I didn’t think anyone in Georgia was excited about the 2015 cotton season. Considering so many farmers who are still holding 2014 cotton are looking at selling it at a potential loss, and the 2015 price is still in the low 60 cent range, and a few gins are still running (I’ve even heard there are a few people stilling trying to harvest their 2014 cotton), we didn’t expect a huge turnout at our 8th Annual Meeting and UGA Cotton Production Workshop. The weather was nice but most fields in South GA were still drenched from the January rains, so there really wasn’t any better place to be than learning from the UGA Cotton Team and hearing updates from some great industry leaders such as Ronnie Lee, President of Southern Cotton Growers; Mark Messura, Senior Vice-President of Cotton Incorporated; and John Maguire, Senior Vice-President of the National Cotton Council. Both the workshops and our meeting were well attended and the exhibit area stayed full as well. The final count came in at 391 attendees.

Our meeting could not have been a success with out the help of our sponsors. If you see one of our meeting sponsors, please thank them for their support of our meeting. The 2015 meeting sponsors were:
AgGeorgia Farm Credit ♦ Agri-AFC, LLC ♦ Allenberg/ProCot  ♦ Americot, Inc. ♦ AMVAC ♦ Bayer CropScience/Stoneville ♦ Cotton Growers Cooperative ♦ Crop Production Services ♦ Dow AgroSciences/PhytoGen ♦ Deltapine ♦ DuPont Crop Protection ♦ Holder Ag Consulting ♦ Lasseter Equipment Group ♦ Southeast AgNet ♦ Staplcotn ♦ Syngenta ♦ Triangle Chemical Company ♦ Valent USA Corporation ♦ VSG Unmanned

It seems that many producers are really looking hard at cotton production cost this year. Of course the biggest questions is “how can I produce cotton at 60 cent.” I don’t think anyone has that answer but it was very pleasing to see our 20+ exhibitors have a consistent flow of visitors at their booths. Producers are really having to crunch the numbers hard to figure our how to get by with the market the way it is.

Speaking of the cotton market, it has become very evident to us that many cotton farmers are not aware of the current situation with China, India, and Turkey. I’ve had to explain these situations numerous times over the last couple of weeks when someone ask me “why is cotton selling at 60 cent?” I enjoy these conversations very much but I think the reason most folks are confused is because there hasn’t been anyone to explain it directly to them all at once. Growers have been getting bits and pieces of the market news/situations over the last 5 years that China has been a big player, but never a comprehensive explanation of how it all fits together and what it means for Georgia cotton in the future. So I think the next few blogs will be about the current market and all of the key players in the market to help everyone understand why cotton is trading so low and why it probably won’t go through the roof anytime soon.