The worldwide COVID-19 health and economic crisis will make it difficult, but not impossible, for cotton farmers to make a profit this year.
John R.C. Robinson, a Texas A&M professor and Extension economist, was optimistic that cotton prices could hit 75 cents per pound this year. Most farmers can make money selling cotton at that price, he said.
Recent trade agreements with two of the top importers of U.S. cotton and an anticipated drop in plantings and supply gave Robinson confidence to make that projection at the Beltwide Cotton Conference in Austin, Texas, in January.
Then, the coronavirus pandemic hit and cotton values plummeted. On Thursday, March 26, May cotton closed at 52.78 per pound, its lowest spot price since 2009 and down from 69.05 cents at the start of the year.
“Most of the trading now is based on fear and uncertainty,” Robinson said. “Cotton demand, like stock markets for major retail and industrial companies, tend to follow expectations for GDP (gross domestic product).
“If the pandemic and its panic is resolved quickly, we could return to an outlook based on the fundamental ending stocks outcome,” he continued.
Robinson recently downgraded his cotton plantings projection from 13 million (close to USDA’s current estimate) to 10.5 million acres this year based on current economic factors. The USDA Prospective Plantings Report will be released Tuesday, March 31.
At 10.5 million acres, Robinson projects production at nearly 14.2 million bales and ending stocks close to 3.2 million bales. If the pandemic subsides in the coming months, he could see cotton prices trading in the upper 60s (cents per pound).
“A lot of farmers are probably not covering costs when futures are below 70 cents,” Robinson said. “But profitability depends on region, yield and cost of production.”
Bryce Wilde, who grows several thousand acres of cotton with family near Lyford, Texas, hopes prices will recover soon. He’ll watch markets closely to lock in profits when he can using basis contracts. (Editor’s note: Wilde is not related to the author.)
Wilde said his family’s operation, Anaqua Farms, has trimmed costs and honed production to lower break-even costs of 63 to 66 cents per pound. Yields average 800 to 850 pounds per acre. USDA projects the national average at 805 pounds per acre this year.
“Demand hasn’t been as high as we like. We need more for prices to go higher,” Wilde said.
The family sells their cotton to Ecom USA in Lubbock, Texas. Most of the Wildes’ production ends up at spinning plants and textile companies in Mexico, Bryce said. As long as the coronavirus subsides, he’s hopeful recent trade agreements will boost prices.
Canada recently ratified the United States-Mexico-Canada Agreement (USMCA), the last of the three countries to do so. The U.S. inked the phase-one trade deal with China in January. Mexico and China accounted for 37% of U.S. cotton exports during the current marketing year as of March 19, according to weekly export sales data compiled by the National Cotton Council of America.
While the agreements won’t bring total stability to the industry, they do ease trade tensions, experts say.
“For cotton specifically, U.S. export commitments are running 20% above a year ago and have been active enough recently to believe USDA’s export estimate of 16.5 million bales will be met in 2019-20,” said Todd Hultman, DTN lead analyst.
The USMCA contained a specific textile and apparel chapter. It promotes greater use of North American-origin textile products such as sewing thread, pocketing, narrow elastics and coated fabrics for certain end items.
Canada only imports 2,000 bales of cotton a year, according to USDA. Mexico is projected to buy 800,000 bales in 2019-20, and almost all of that is from the United States. Reports indicate imports could hit 900,000 bales.
“We can produce a really high-quality cotton, but haven’t got the premiums for it lately,” Wilde said.
Even though cotton already enjoyed duty-free status north and south of the border, there is hope sales could increase, especially to Mexico. U.S. cotton fiber works well in high-speed textile machines often used in Mexico, according to industry reports.
The phase-one trade deal with China should be “moderately bullish” for U.S. cotton prices in 2020 and 2021, according to Hultman. However, he added it’s difficult to anticipate how much exports may benefit. The additional 25% tariff on U.S. cotton by China levied during the trade war still exists, but the 15% tariff on Chinese apparel imports to the U.S. won’t increase to 25% due to the trade deal.
Even though China is supposed to significantly ramp up ag imports per the trade agreement, they can’t be forced to buy any more cotton than they need or can afford.
“Even so, a relaxation of tariffs for Chinese companies is expected to result, which could give U.S. cotton exports a boost of 1-1.5 million bales,” Hultman said.
OIL AND COTTON
Cheap oil and cotton don’t mix, Hultman said.
Saudi Arabia recently announced it was cutting oil prices for its customers and later moved to increase export capacity to 13 million barrels per day. Polyester is made from petroleum and competes with cotton.
“Given the bearish developments the past two months, it is going to be difficult for producers to get a decent price for cotton in 2020,” Hultman concluded. “Unless Saudi Arabia is persuaded to return to its lower level of oil production, a spot cotton price in the upper 60s (cents per pound) may be the best producers can hope for in 2020.”
Matthew Wilde can be reached at firstname.lastname@example.org
Follow him on Twitter @progressivwilde
Source: Matthew Wilde, DTN
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