Many who don’t farm cotton or are not involved in the cotton industry may not understand why the cotton industry is asking the Secretary of Agriculture to use his authority to list cottonseed as an ‘other oilseed’ under the current commodity programs.
Farming, like any other business, requires an investment by the owner and investments throughout the industry to maintain a viable industry. Nobody would farm cotton in Georgia if we didn’t have over 60 gins in operation to gin cotton, and no gin would exist if they didn’t have cotton to gin. Many of these gins are also owned or partly owned by farmers. The gins also would not exist if there were not merchants and mills to buy the cotton. And the spinning and textiles mills would not exist if there were not consumers to buy the cotton products. Likewise, cottonseed oil mills would not exist if they didn’t have a steady supply of cottonseed to crush. Farming cotton is the critical base for the cotton industry that allows the rest of the industry to function.
If you take the cotton farmer out of this equation then the gins, merchants, and mills will suffer. Gins just don’t pop up overnight and once a gin closes it is rare for a gin to return to that area. Most of the cotton spinning capacity that the US had left years ago in search of cheaper labor. The spinning industry that remains in the US would be crippled without a local source of high quality cotton coming from the gins.
All this may seem hypothetical but due to the current economic situation it is a stark reality that the US cotton industry is facing. At current prices, Georgia cotton farmers will not be able to cover their cost of production. This is normal in the up and down price swings that commodities usually see. Unfortunately 2016 will be the third year in a row where growers are facing losses.
Using the UGA Cotton Team’s annual budget spreadsheets, one can easily see that at $0.61/lb for cotton and a 1200 lb/acre yield, a grower will lose about $137/acre on irrigated cotton. Using an 800 lb/acre yield and the same $0.61/lb price for cotton, you find that a Georgia cotton farmer will lose about $132/acre on dryland cotton. Prices have hovered in the 60 cent range for all of the 2015 season and even saw a brief dip into the 50 cent range. Only a handful of days did we see the price of cotton get close to 70 cents/lb. This week (January 15, 2016) prices have been around 61 cents. 1200 and 800 lb/acre yields are considered average to above-average for irrigated and dryland cotton, respectively, in Georgia.
Normally when any commodity market sees a decline in price it will only last for one or two growing seasons. Acreage shifts and a reduction in overall output generally pull a commodity back up to at least a break-even point. What is happening in the current cotton market is vastly different. Both China and India have support programs in place that ensure their local cotton farmers are receiving well over the current world market. As we have written before, these programs operate differently and are set at prices much higher than the old counter-cyclical program in the US. China and India have also accumulated a lot of cotton that is currently being stored for later sale. The best estimates are that China alone has at least 50 million bales of cotton in storage. This has and will continue to weigh cotton prices down.
The need for cottonseed to be designated as an ’other oilseed’ eligible for the PLC/ARC program is evident. Without some type of support we will definitely see more cotton farmers go out of business in Georgia. We have already began to see large equipment auctions, and it isn’t hard to find an auction sign next to a field in the southern part of Georgia. A potential PLC/ARC cottonseed payment will not be silver bullet and it will not cure the low prices received for cotton. A cottonseed payment would keep many growers afloat and should get them close to a break-even point on their operations. Current estimations are that a cottonseed PLC payment would be about $75-$95 an acre in Georgia depending on the farm’s yield. As we’ve shown above, growers would still be about $50 per acre short of covering cost but that is better than being $130+ per acre short. Rural bankers and ag lenders would feel a little more comfortable loaning farmers money if a cottonseed PLC/ARC program was in place.
In conclusion, the cotton industry will continue to urge Secretary Vilsack to use his authority granted in the 2014 Farm Bill to declare cottonseed as an ‘other oilseed’. As we’ve shown, a small payment to help cover the expected revenue shortfall would not only help cotton farmers in Georgia but it would allow the rest of the cotton industry to survive.