NEW YORK — The U.S. cotton industry has been battered by the global recession and faces a tough road to recovery without a significant spike in consumer spending.
This story first appeared in the September 1, 2009 issue of WWD. Subscribe Today.
U.S. farmers have seen the incentives to plant American cotton dwindle in recent years, as a consistent global oversupply helped keep prices low. That situation has only been exacerbated by the drastic pullback in consumer spending, which resulted from the global economic downturn. According to WWD’s monthly fiber price sheet, the price for a pound of cotton reached 71.82 cents in February 2008, but fell to around 37 cents a pound by November 2008. Prices have since rebounded to between 55 cents and 60 cents last month, but aren’t high enough to encourage farmers to commit to cotton.
According to the United States Department of Agriculture’s National Agricultural Statistics Service, 8.9 million acres of cotton were planted this year, down 40.4 percent from a high of 14.9 million acres planted in 2006. Production has fallen by more than 44 percent to an estimated 13.7 million 480-lb. bales from 23.3 million bales in 2005.
“The biggest reason for that is not so much about what’s happening with cotton as much as it’s got to do with what’s happening with other crops,” said J. Berrye Worsham, president and chief executive officer of Cotton Inc.
In addition to falling global demand, Worsham noted cotton has faced stiff competition for farmers’ attention from two other crops over the last five years. Corn, led by skyrocketing demand for ethanol, was the first to make a dent.
“The price of corn went off the charts, and we lost acres to corn,” said Worsham.
No sooner had corn prices stabilized than the price of soy beans began to rise. The average price for a bushel of soybeans was $6.43 in 2006, according to the USDA. Today, a bushel fetches closer to $10.
“Cotton’s prices haven’t come up nearly to the point that would be attractive compared to some of these,” said Worsham.
Despite the turn to higher profit crops, cotton supply continues to outpace demand by a significant margin. In mid-August, the USDA put the supply of U.S. cotton at 19.3 million bales, while demand was expected to be 13.7 million bales. In comparison, demand for U.S. cotton stood at 23.4 million bales in 2005.
The picture is similar for the global cotton industry. The USDA said that as of August, the global cotton supply stands at 167.7 million bales, while consumption is expected to be 112.8 million bales.
Worsham said cotton demand in the U.S. has been down around 10 percent this year compared with a traditional growth rate of between two percent and three percent.
“A 10 percent reduction is massive by historical standards,” acknowledged Worsham.
While prices have rebounded and small signs of broader global economic stability are beginning to appear, the contraction in cotton is unlikely to reverse itself rapidly. Farmers who’ve left cotton behind aren’t likely to return to the crop unless assured of the potential for decent profits.
Aside from that, Worsham noted many of those farmers made significant investments in equipment and other infrastructure when they shifted to farming corn or soybeans. They’re unlikely to turn their backs on those investments after such a short amount of time. Worsham added that if production continues to stay low, more cotton ginning operations will also be forced to close, removing another level of infrastructure in the process.
“Another three or four years of this and there could be a significant problem,” he said.
Robert Antoshak, president of FC Stone Fibers & Textiles, a commodity risk management and consulting services firm, believes there is good news in the kind of U.S. cotton being sold for export.
“What’s telling is that there really has been a shift in quality being shipped overseas,” said Antoshak. Mills in India and China have sought better qualities, and U.S. growers have been in a position to satisfy those needs. “What’s happened over the last five years is a shift into longer-staple, higher quality upland cotton.”
Antoshak believes U.S. cotton growers stand to benefit by positioning themselves as the world’s supplier of higher quality product. He also believes some farmers have not gotten the return they expected with corn and, as a result, may reconsider cotton.
“I’m a little more optimistic because I think this is better because the crop is better than it had been,” he said.
Still, Antoshak doesn’t see the U.S. cotton market returning to producing the more than 20 million bales it did prior to 2007.
“I see it coming back up, but I don’t see it hitting those numbers,” he said.