This is an interesting moment in time to reflect on U.S. agriculture, the cotton industry, and the condition of our market.
The market has been recently described as a race to the bottom between production and consumption, as we have witnessed yet another consecutive small U.S. crop due to environmental challenges in Texas aligning with lower U.S. exports and global consumption. This begs the question, “Will demand return in time to consume a normalized production cycle?”
Among all the normal variables, we are faced with two major realities that will make our business more challenging moving forward. First, after almost a decade of ultra-low interest rates, we have seen unprecedented quantitative tightening from the Federal Reserve that has led us into an era of significant new costs that must be managed by the trade. As we gradually become a more expensively produced and delivered growth compared to competing exports, the old saying “time equals money” resonates stronger than ever, with the costs of carrying the U.S. crop now reaching levels well over $1 million per day.
As demand naturally ebbs and flows, we have to be equipped to provide growers with liquidity and have flexibility in our marketing decisions. Stakeholders in the U.S. cotton industry should take comfort in the efficacy of the marketing assistance loan administered by USDA, which lays the foundation for resilience in the producers’ safety net and marketing strategies. No other country in the world has the tools to support the costs of carrying physical cotton in the market. Modernizing and enhancing this program to reconcile with current production costs and market fundamentals should be a top priority for our industry as we debate the farm bill’s extension or reauthorization. No other program in our farm bill has the dual impact of curbing costs while affording the opportunity to market in an orderly fashion.
The second hurdle comes on the consumption side. For decades, we have enjoyed a constant increase in global consumption of all fiber types collectively, associated with population sprawl and increased affluence around the world. This has created increases in global cotton consumption despite a steady decline in market share. In the last 20 years, cotton has systematically lost half of its market share compared to all other fibers, declining from approximately 40% to 20%. With total fiber consumption checked by a slower global economy, this is an untenable glideslope for cotton.
Looking Ahead
These challenging times illuminate opportunities to improve as an industry. Right now, we need to focus on two things to mitigate these challenges.
First, our industry must consider these newly introduced costs of carry and incorporate strategies to make our cotton more liquid and competitive when compared to competing exportable growths. Our competitors, primarily Brazil, are scaling on us. This year, we saw Brazil surpass the U.S. industry in production for the first time, and they are quickly trending to do so in total exports as well. If we don’t take the necessary steps to increase global cotton consumption, we will have much bigger problems than our comparative value to Brazil’s industry. In fact, competing exporters, merchants and cooperatives, shippers, and warehousemen won’t have much to fight over.
The American Cotton Shippers Association is working with our competitors around the world to focus on how we can better promote cotton generically to regain market share against synthetic fiber. We need a fresh focus on the generic promotion of cotton compared to synthetic fiber and boldly engage end users to create demand for the attributes of our product from a global perspective.
Brands and retail groups steered by consumers’ prerogatives have proven their ability to mandate change in our industry through the call for sustainability and traceability. This has drawn our industry into closer connectivity to end-users than ever before, giving us the forum to stress the importance of recognizing cotton’s inherent and positive characteristics compared to manmade fiber and our industry’s impressive trend in resource management. While these are both heavy lifts, they are necessary for our industry’s long-term health.
Source: https://www.cottongrower.com/