By Dr. O. A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
Cotton prices have enjoyed the most fantastic run in history, having jumped more than 100 percent in less than six months. While prices are off their record 157.23 tick, they will remain strong well into 2012, with excellent possibilities to keep the run going into 2013. The new crop December (December 2011) will once again move above the one dollar level and could reach into the one dollar plus, i.e., the “teens.”
Return to 1970 and Russia’s political decision to upgrade its people’s diet. In 1973 the country suffered its worst wheat crop failure ever. Needing feed for livestock to maintain its promise to upgrade the country’s diet, the Russian government sent representatives to the U.S. and over a single weekend purchased much of the U.S. wheat crop. The exchange opened Monday morning and no one could understand why the wheat market immediately jumped to limit up — a trend that continued for several days. Then the traders learned that the Russian buyers had gone to every wheat exporter of substance the prior weekend and purchased “all" the U.S wheat crop.”
After much uproar, wheat, little more than a $2.50 per-bushel commodity, jumped well above $6.00. Other field crops received a small boost in price, but wheat was the real story as that was the only commodity in a deficit production quandary. Too, that supply/demand situation was resolved and the price rations of world field crops came back in line. Remember, Russia was feeding about 130 million people.
Fast forward to 2000 and both China and India have made the political decision to upgrade its people’s diet. The Chinese selected pork and the Indian government selected poultry — remember animals need grain. These two countries are feeding well more than one BILLION people — ten times that of Russia’s 1973 needs. In the process China has become the world’s largest importer of both corn and soybeans (they already were the world’s larger importer of cotton). Further, the U.S. made a political decision to use corn as the feedstock to produce ethanol. The mid -2000s also saw significant oilseed and wheat crop disasters, (Europe and Australia, respectively). Thus, the world was on the brink of a food disaster by the 2005. The demand for oilseeds, feed grains and food grains had jumped well above the supply and prices had to skyrocket. Yet, cotton had the largest supply of stocks on record. Presto, price ratios moved immediately in favor of grains and oilseeds, leaving cotton acreage to plummet.
The world is no longer on the brink of a food disaster, but supplies remain tight. The world has used its surplus of cotton supplies — taking five years to do so. All this says is that economics works. With cotton supplies used the market has to catch up with the grains and oilseeds. More specifically, the price ratios between the various field crops have to come back in line. That is what dollar (plus) cotton has done. Yet, the world cotton supply cannot be rebuilt in a year. Neither can the oilseed and grains stocks as we are seeing. Cotton is now on a competitive tract for acreage and will remain so for at least two years and specifically until all the commodities can rebuild supplies.
The next step will be for additional land to be brought into production — and there is plenty of it. Yet, that will take some 5 to 10 years. In the meantime cotton has joined the party and will see many more months of the magic dollar sign.