Cotton Crop Expanding After Corn Slump Spurs Switch: Commodities

In the Texas panhandle, the center of U.S. cotton country, it wasn’t just higher prices and a lingering drought that influenced Dee Vaughan’s crop plans for his 7,000-acre (2,800-hectare) farm. It was corn.

The grain’s 48 percent plunge from a record in 2012 made it three times more profitable to grow cotton in Texas after fiber prices rebounded from a three-year low. Vaughan said he will plant 23 percent more cotton on a record 1,350 acres and cut corn by 13 percent to 2,000 acres. That signals a rebound in output by the U.S., the largest exporter, a year after shipments fell to the lowest in a decade.

“2013 was the most profitable year we ever had on cotton,” said Vaughan, who also grows wheat and sorghum in Dumas, 47 miles (76 kilometers) north of Amarillo. “It’s a combination of economics and weather. Cotton grows better in dry land like Texas, and the price is staying strong.”

U.S. cotton planting probably will rise 7.6 percent to 11.2 million acres in 2014, the first gain in three years, according to the average of 12 analyst estimates compiled by Bloomberg. Goldman Sachs Group Inc. says rising supply will drive prices down 12 percent to 75 cents a pound in three months. Global stockpiles will be a record by July 31, the U.S. government estimates. The glut will reduce costs for clothing makers including Hanesbrands Inc.

Outperforming Corn

Farmers reduced U.S. planting for two years after prices plunged as much as 71 percent from an all-time high of $2.197 in 2011 and averaged 79.71 cents in 2012, the lowest since 2009. Futures rallied 13 percent in 2013 as corn, the biggest U.S. crop, tumbled 40 percent, the most on record going back to 1960, as output surged to the most ever and demand slowed.

Cotton is up 11 percent since the end of October on ICE Futures U.S. in New York to 85.4 cents, while the Standard & Poor’s GSCI Spot Index of 24 commodities rose 0.1 percent. The MSCI All-Country World Index of equities fell 3.1 percent.

“There’s a short-term tendency to be bullish because of foreign demand for U.S. supplies,” said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, which manages $1.4 trillion of assets. “The trend will not last because of the record stockpiles and the increased plantings. We don’t recommend it to long-term investors.”

Texas Profit

In Texas, the largest U.S. cotton producer, farmers last year earned about $105 an acre from the fiber, after growing costs, land and labor, compared with $32 on corn, according to estimates by Jay Yates, a risk management specialist at Texas A&M University’s Agrilife Extension in Lubbock. The profit gap will encourage increased cotton supplies from the state, where planting will begin this month, he said.

The “outperformance of cotton prices relative to corn” will boost U.S. acreage and add to inventories, Goldman Sachs analysts led by Jeffrey Currie, the bank’s head of commodities research, said in a report Jan. 12.

Global cotton output will exceed demand for a fourth year, with global stockpiles on July 31 reaching 97.6 million bales, the U.S. Department of Agriculture estimates. That’s almost double the amount held in 2011 and is enough to make 16 t-shirts for every person on the planet, industry data show. China will hold 58.31 million bales, five times more than in 2011, the USDA said. A bale weighs 480 pounds, or 218 kilograms.

The National Cotton Council will release its first planting estimate of the season on Feb. 8, based on a survey of growers. The USDA’s next forecast will be on Feb. 20 and cover a planting seasons that runs from March through July, with harvesting usually in the last three months of the year.

Persistent Drought

Production gains may be limited by dry weather in Texas and water shortages in California, the nation’s third-largest grower, which declared a drought emergency on Jan. 17.

Parts of Texas got 25 percent of normal rain since Dec. 1, Donald Keeney, the senior agricultural meteorologist for MDA Information Systems LLC, said Jan. 31. The drought will expand because rains will be about 50 percent of normal through May, he said. About 81 percent of the state was abnormally dry as of Jan. 28, according to the U.S. Drought Monitor.

The prospect of limited water supplies will discourage more planting for Jeremy Brown, a fourth-generation grower in Dawson County with 1,500 acres. Only 40 percent of his land is irrigated, so the rest relies on rain to survive. Brown, 33, said he will keep his 2014 cotton crop unchanged at 1,200 acres.

Financial Incentive

Prices may not have risen enough to encourage a surge in output, said Louis W. Rose, the president of Risk Analytics in Memphis, Tennessee. Futures for delivery in December, a benchmark for some growers, settled today at 76.96 cents. If the contract remains below 80 cents, the crop wouldn’t be profitable enough for some farmers to switch, which would prevent planting from reaching 11 million acres, he said.

“We could be looking at the same cotton area we saw last year or even less in some regions like Arkansas, Missouri and Tennessee,” Rose said. In those states, located in the northern part of the U.S. cotton belt, “it’s more expensive to produce cotton there than other crops,” he said.

Hedge funds and other speculators cut bullish bets on cotton last week by 11 percent, U.S. Commodity Futures Trading Commission data showed Jan. 31. The holding had risen more than sixfold since Dec. 3.

Demand continues to slow with increased use of synthetic fibers in clothing and textiles. The shift reduced cotton use to 30 percent of the global apparel market last year, from 38 percent in 2008, according to the Washington-based International Cotton Advisory Committee, an industry group.

Chinese Demand

Consumption growth is also slowing in China, the biggest user, where imports will plunge 46 percent in the year ending July 31, as its domestic stockpiles swell to a record, the USDA says. China will use 36 million bales, from 51 million in 2008, the data show.

China is moving away from government stockpiling of cotton as a way to aid farmers, which tightened supplies available to domestic mills forced to buy more from overseas. The Asian country is testing direct subsidies to growers that will erode state purchases, with prices headed to the mid-70 cents in the second half of 2014, Macquarie Group Ltd. said in a report last month.

Expectations of lower cotton costs helped boost shares of clothing makers, according to Chen Grazutis and Poonam Goyal, analysts at Bloomberg Industries. Shares in the 17 branded apparel companies tracked by Bloomberg Industries were up 27 percent since January 2013, exceeding the 17 percent gain in the Standard & Poor’s 500 Index.

Hanesbrands Benefit

Lower cotton prices provided a “modest” benefit on profit margins during the fourth quarter for Hanesbrands, the maker of Hanes underwear and Playtex bras, Richard D. Moss, the chief financial officer for the Winston Salem, North Carolina, company, said on a Jan. 29 conference call.

Jon Whatley, 45, a fourth-generation grower, is planning to increase his cotton acreage by 15 percent this year on the 5,000 acres he farms in southern Texas. About half his land, which also includes wheat and corn, will be devoted to the fiber.

“It’s probably the most in about three or four years,” Whatley said by telephone from Odem, Texas. “Last year’s prices for cotton and corn are the driving force. I have to choose the lesser of two evils.”

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