Cotton Outlook

Over the last month or so, I have had conversations with many of you. Some of those conversations were marketing calls and others more general in nature. At some point in all of these conversations comes the question: “What’s going to happen with the cotton market,” or “What do you think about the cotton market,” or “What are you going to do this year?” My response has consistently been: “I feel certain this market will recover. I just don’t know when,” and “We are going to plant cotton on our farm.”

I try to stay apprised to the current and ever-changing marketing situation daily by reading commentary from “experts,” watching patterns, following current events, and studying the latest USDA and National Cotton Council reports. Recently, it has been easy to obtain bad or depressing news. However, all news is not bad; sometimes, you just have to search for the silver lining. While we do not do a weekly or monthly newsletter here at the gin, we do try to keep our customers apprised of current and changing information, and I wanted to take this opportunity to provide a more in-depth explanation of my feelings about a market that will surely recover and our decision to plant cotton on our farm despite lower prices. Additionally, there are many government programs and marketing tools available to help us cope with the current situation.

So, let’s start with the negative (explanation of why the market is down) and get that out of the way so we can look at the fundamentals of growing and marketing cotton in a depressed environment and reasons the market should recover. First, as you all remember, we have been in the middle of a trade war for more than a year and a half. China, The Trade War, and Tariffs controlled the headlines of all cotton marketing newsletters and reports for the last half of 2018, all of 2019, and the beginning of 2020. The December 2018 cotton market was trading at a five year high in June of 2018 when talks of a trade war became serious and the first tariffs were implemented in July. The December futures dropped nearly twenty cents before the first bales of the season were ginned. The market continued to suffer over the next eighteen months despite very healthy sales and exports in the latter part of the 2019 marketing season.

It almost seems surreal that a problem of this magnitude, which was the focus of daily conversations, has taken a back seat to a new problem, The Novel Coronavirus. With more than 2 million cases and 132,000 dead worldwide from the virus that is so easily spread due to the long incubation period, it is a problem that affects most humans across the planet. It affects the growth, processing sales, and use of cotton and many other commodities worldwide. Here at home in the United States we have seen more than 600,000 cases and 24,000 deaths. Businesses are shuttered, essential goods are in short supply, and we are only hopeful that we are finally seeing the flattening of the curve. In just a little over ten weeks, the cotton market has fallen about fifteen cents.

Now, due to this global pandemic and economic slowdown that is unlike any other most of us have ever seen, USDA has lowered US export projections for 2019/20 by 1.5 million bales to 15.0 million bales and reduced worldwide consumption by 7.6 million bales. Consequently, ending stocks projections have been raised to 6.7 million bales domestically and 91.26 million bales worldwide. This means that the 2020 marketing year will begin saddled by more carry than in recent years.

Okay, enough of the bad. Let’s look toward the future. Everyone starts a new crop with a little different attitude. I choose to be the “glass half-full with the water running” guy. I am preparing to grow and gin a bumper crop. After all, why start something if you don’t plan on being successful. On the farm we are busy burning down, fixing new ground, cleaning up around fields, and watching the weather to determine when we should put some seed in the ground. At the gin, we are going through every piece of machinery making necessary repairs and planning projects that will boost production and enhance quality. Basically, we have the whole growing and harvesting season in front of us to do with it what we may.

As the old Charles R. Swindoll saying goes, “Life is 10% what happens to you and 90% how you react to it.” So, let’s discuss the 90%. As we prepare to plant a crop in a depressed marketing situation, we must remember the growing and marketing tools that got us to this point. Yes, everyone is looking for a cheaper way to make a crop. We are too! It is a good business practice to review your inputs and expenses annually and cut costs wherever possible. However, we don’t want to make decisions that can greatly curtail our yields because, after all, we get paid by the pound. In that same respect, we must look at marketing tools that will help us through these challenging times without going off the deep end and forgetting what we always know to be true.

First, it is important to remember that we are a long way from harvest. Many years, we get an opportunity to sell cotton at the “Spring High.” 2020 started off with a market that was finally reacting to the record sales and exports numbers USDA had been reporting for some time and talks of a trade deal had been getting stronger and stronger with a Phase 1 deal being signed in mid-January. Many cotton marketing experts had projected that the proverbial “Spring High” would come and give us the opportunity to set a floor under our cotton. However, the virus struck just at the wrong time.

The good news here is the promise of increased Chinese purchases of American farm, energy, and manufactured goods that was laid out in Phase I of the trade deal. This virus will end! It is not going to last forever. When it does end, I cannot help but think that most progressive countries will be anxious to get mills running, stores opened, and boost their economies. Hopefully, the resurgence of economic activity coupled with the effects of a trade deal will result in higher demand for cotton and increased prices for producers. I think the reason USDA and others are currently reporting such depressed conditions is the uncertainty of time. How long will it take the world to recover from the pandemic and get back on track? A vaccine would certainly help things along.

In the meantime, we have several valuable survival tools available to us. Some are automatic and others require grower participation. The first are the USDA’s Loan Deficiency Payment (LDP) and Marketing Loan Assistance Program (Loan) that is available for US cotton producers. LDPs are direct payments made to producers that choose to sell their cotton on the open market when the Average World Price (AWP) is below applicable loan rate (52 cents for 2020). For example, if you were marketing 2019 cotton today, you could receive a 7.71 cent LDP payment for it and then sell that cotton for $0.5275 yielding you a gross payment of $0.6046 per pound or about $300 per bale. The Loan provides interim financing to producers allowing them to store commodities upon harvest and sell them later when pricing conditions are more favorable. Cotton can remain in the Loan for up to 9 months. There are some fees associated with placing cotton in the Loan. For both programs, the producer must still have beneficial interest in the cotton. Both programs, if used advantageously, typically allow growers to put a floor of around sixty cents under their cotton. Growers can participate in either of these two programs, but not both. For more information on these programs, consult your local USDA office.

Should the market still be in a depressed state this fall but there are signs of recovering economies across the globe and expectations of higher prices to come, growers could also choose to take the LDP payment, market their cotton, and buy Calls to benefit from any upside movement. I am relatively conservative when it comes to marketing options such as Puts and Calls. However, this scenario allows growers to collect all their money, eliminate downside risk, and still benefit from a market that recovers after harvest. The downside of this scenario is the cost of purchasing the options.

Another resource we now have available is the Price Loss Coverage (PLC) payment which is a price-based commodity assistance program based on seed cotton prices, i.e. a combination of both lint cotton and cottonseed. This program is now available due to cotton being reinstated to Title I of the Farm Bill two years ago. This payment is automatic provided the grower elected to sign up his/her generic base acres in the PLC program (this was a one-time opportunity). While the actual payment is based on prices for both lint cotton and cottonseed throughout the marketing year (August 1^st – July 31^st), the payment for 2019 is currently projected at $137/program acre based on a PLC Payment Yield of 950 lbs/acre. Of course, no one knows how the 2020 year will end because it is only just beginning, but if today’s prices remained true throughout 2020, a grower could expect to receive $180+ per program acre.

We can’t forget Revenue Crop Insurance as a tool either. Though we (growers) complain regularly about crop insurance, the cards are stacked in our favor this year. The spring price was set at $.6800/lb for the 2020 growing season. If cotton prices remain low though October, the probability of triggering a payment is increased, even with decent yields. Additionally, for many of our customers in Northeast Alabama and Northwest Georgia that have been true to cotton over the last ten years, it is important to note that when all commodities are depressed and planting decisions are based on risk assessment, cotton usually pencils out the best. Many of you have phenomenal yields and ample history with cotton. Back in 2008 and 2009 when we saw a brief reduction in cotton acres due to high grain prices, many growers admitted that they bought their combines and grain trucks with cotton revenues. Cotton is a dependable crop for our area, soil types, weather patterns, and lack of irrigation.

Lastly, I must mention that for many of us the Market Facilitation Program (MFP) payment has been our saving grace the last couple of years. This program was activated in 2018 as a relief from the effects of the trade war and was originally expected to end in 2019. However, since we have not yet realized any relief Phase I might be sending our way, there are serious discussions about a 2020 MFP. As you all will remember, the 2018 MFP was coupled to production, meaning your payment was based off acreage and commodity, while the 2019 payment was de-coupled, meaning the payment was based off planted acres rather than the specific crop. Even though the 2019 payment was not based off a specific crop, counties that were heavy in cotton acres received some of the highest payments.

I am confident that through our social distancing efforts and the development of a vaccine for Covid-19 we will be able to eliminate this virus and open the world back up for business. I am also confident that our political leaders will be able to resolve any remaining trade grievances with China allowing markets to recover and cotton producers to obtain a fair, healthy market price for their cotton without assistance. However, we know that both these enormous tasks will take time. In the meantime, it may be comforting to remember that following most disasters comes a new and brighter day. Following the September 11, 2001, terrorist attacks on the World Trade Center, cotton dipped into the upper 20s. However, two years later it had bounced back into the upper 70s. The same happened following the recession of 2008-2009 when cotton dipped into the lower 40s but quickly recovered into the 80s within a year and soared above the $2.00 mark in February of 2011.

I encourage you to pray for resolutions to the virus and the trade war. In the meantime, please know that the staff of Cherokee Gin & Cotton Co. is here to support you in every manner possible. If you have questions regarding any of the opportunities discussed in this outlook, please do not hesitate to call, email, or come in to discuss. Richard, Freida, Mindy, and I are all available to you. If we do not know the answer, we can definitely get you to the right person.