WASHINGTON, May 25, 2017 – A spike in cotton prices has gotten the attention of growers and policymakers, but analysts say it’s likely temporary and may have little impact on producers’ pocketbooks or the cost of their farm bill proposal.
Futures prices have risen sharply in recent weeks, driven by tightening supplies left from the 2016 harvest. During a recent appearance before the House Agriculture Committee, Agriculture Secretary Sonny Perdue cited the price increases as “good news” for U.S. growers, who have been lobbying him to make the commodity eligible for the farm bill’s Price Loss Coverage program.
“Certainly, the best thing is that cotton prices continue upward, that’s the ultimate solution,” Perdue said. He left little doubt that he was unlikely to approve the industry request, citing legal issues and the budgetary impact. That would leave the industry request up to lawmakers to address in the next farm bill. He said his options were “very, very limited.”
Cotton futures have already settled back from recent highs, and analysts say that increased plantings this year are likely to keep downward pressure on prices. Cotton for July delivery, which represents the 2016 crop, shot as high as 87.18 cents per pound two days before Perdue’s testimony on May 15, according to analyst Michael Seery, but have since fallen back to about 78 cents. December futures, which represent the 2017 crop, have been trading closer to 73 cents a pound. The May 15 spike was likely a “blow-off top,” driven by strong demand for the old crop, Seery wrote.
USDA, in its May outlook for the cotton sector, estimates that prices paid to farmers for the 2017 crop will average about 64 cents per pound, which would be a slight decrease from the estimated average price for the 2016 crop of 69 cents. The 2015 crop fetched just over 61 cents per pound. U.S. production is expected to increase 12 percent this year, significantly increasing ending stocks.
Gary Adams, president and CEO of the National Cotton Council, said most growers have already sold their 2016 crop. “There’s not a lot of cotton to be sold at this point from The producers’ perspective,” he said. The improvement in prices “still leaves a lot of them in a very tight financial situation when we look at where they are relative to the cost of production.”
Cotton generated about $674 an acre in gross revenue on the 2016 crop, while variable expenses (seed, fertilizer and the like) averaged $498 an acre, according to the University of Missouri’s Food and Agriculture Policy Research Institute. This year’s, FARPI estimates gross revenue this year will slip to $630 an acre and variable expenses will rise to $505 an acre. Adams said cotton growers typically have another $300 per acre in fixed costs from land and labor.
Even if cotton prices remain strong, however, that won’t necessarily make it easier, or less costly, for producers to get Congress to make them eligible for PLC in the net farm bill. That’s because the industry is seeking to add cottonseed, not fiber, to the farm bill on the theory that it will be harder for Brazil or other foreign competitors to challenge the subsidies at the World Trade Organization. The industry was left out of PLC in the 2014 farm bill because producers responded to an earlier WTO case by opting instead to rely on a new revenue insurance policy, called Stacked Income Protection (STAX).
Cottonseed accounts for about 20 percent of growers’ revenue, and prices move independently from fiber because cottonseed is competes with other oilseeds, an entirely different market. Even as the fiber prices have risen over the past two years, cottonseed prices have been sinking, from $227 per ton in 2015 to $195 this year. USDA expects prices for the 2017 crop to average about $185 a ton. Those prices are well below the PLC reference price NCC has been seeking of $15.88 per hundredweight, or $317 per ton.
The decrease in cottonseed prices has already increased the cost estimate for the industry’s PLC provision by about $1 billion from last year.
Adams said growers hope that the cotton prices will stay up, “but between increasing production here and abroad, and the competitive form manmade fiber, we have to be wary,” he said.
During a hearing before the House Agriculture Appropriations Subcomittee on Wedneday, Perdue made clear that he was unlikely to act on his own to make cottonseed eligible for PLC. He told Rep. Steven Palazzo, R-Miss., that USDA’s general counsel has not budged from its position it took under the Obama administration that the secretary lacks the legal authority to declare cottonseed as an “other oilseed” eligible for PLC.
Perdue said there would be budgetary problems as well with the request for administration, suggesting that the Office of Management and Budget wouldn't approve the expenditure.
House Agriculture Chairman Mike Conaway, R-Texas, has disputed the USDA general counsel's opinion on the issue.