In some respects the fundamentals of the cotton market today are similar to those of the mid-1990s. World ending stocks for 2010/11 are projected to be 42.2 million bales; the lowest since 1995. The World stocks-to-use ratio (36 percent) has fallen to the lowest level since 1993. However, U.S. ending stocks are lower today than at any point in the 1990s. The USDA currently expects U.S. ending stocks to be 2.2 million bales by the end of the 2010/11 marketing year. Throughout the 1990’s, U.S. ending stocks only dipped as low as 2.3 million bales in 1990. The last time cotton futures traded over $1, U.S. ending stocks were 2.6 million bales for both the 1994 and 1995 marketing years.
Back in early 1995, the futures market did its job and demanded that the U.S. and northern hemisphere plant more acres to cotton. From January to May of 1995, the December futures contract averaged 77 cents. In contrast, November ’95 soybean futures averaged $5.91 over these same months. Roundup Ready cotton varieties had arrived, producers and ginners alike had embraced the module, and the decision to grow cotton was an easy one. U.S. cotton acreage in 1995 increased an astounding 3.2 million acres (23%) over the previous year to a total of 16.9 million acres--the highest acreage planted since 1956 and a total that has not been exceeded to date. Once again, the New York futures market is sending a blatant signal for growers to plant more cotton. As of this writing, the December 2011 futures contract is trading at 95.50, a price that most any grower would view as profitable.
Will history repeat itself next year? It’s debatable. Some things have certainly changed since 1995. A good place to start this discussion is on cotton’s competitors for acreage. The “acreage battle” that we so often hear about today is a result of how much the world has changed over the past two decades. For example, in 1995 the U.S. exported 20.5 million bushels of soybeans to China. In the 2010/11 marketing year, total soybean exports to China are expected to be 882 million bushels! The tremendous oilseed and meal demand growth seen over the last decade in developing countries, particularly China, has placed more dependence on the U.S. to be a consistent and reliable supplier of soybeans. Even with consecutive years of record production in 2009 and 2010, export demand is growing at a pace that is preventing any significant accumulation of U.S. soybean inventories. Compared to the average spring 1995 soybean price mentioned earlier (less than $6), the November 2011 contract trades at $12.32 today.
The fundamentals for the U.S. corn market have changed as well. In the spring of 1995 and in the pre 9/11 world, crude oil was trading between $18 and $19 per barrel. By July 2008 NYMEX crude oil hit an all- time high of $147.27. It was time for the world to take a long and serious look at alternative energy sources. Ethanol was one of those sources. In the category the USDA terms as “food, seed, and industrial” (which includes ethanol), the U.S. was using about 1.7 billion bushels of corn or 20% of production for these purposes in 1995. Today, the U.S. is using 6.1 billion bushels of corn or 46% of production for “food, seed, and industrial” use; 4.8 billion bushels of this total is used solely for ethanol. And, by the way, corn prices were $2.57 per bushel back in the spring of 1995. September 2011 corn futures trade today at $5.69.
A final point in the 2011 acreage forecasts is weed resistance. As mentioned earlier, Roundup Ready cotton was newly available in 1995. This was without a doubt a game-changer and a deciding factor for producers who had no experience growing cotton. Ironically, fifteen years later cotton growers find themselves at a point in time when glyphosate is losing its edge and dominance in pigweed control. At the moment there are few, if any, alternatives that match the ease and simplicity that a glyphosate weed control program provided for so many years. For those that never mastered the art of applying post-directed residual herbicides to cotton in the “pre-Roundup Ready” era, the desire, knowledge, and patience required to grow cotton may not exist.
In summary, it’s not a sure bet that U.S. producers will respond to high cotton prices in much the same way as they did in 1995. There are more grain bins and combines found today on the once traditional Delta cotton farms, and certainly there are fewer cotton gins. The world has changed, and thus it will likely require a world-wide effort in 2011 to replenish cotton supplies.
