April 15, 2020 - Cotton Profit Margin Hide and Seek
With the cloudy start to #Plant2020 and poor commodity pricing, this month we review potential market forecasts and some ways to improve profit margins.
Now I am no astrologist, but for those who may be, you were probably more than aware of the "Pink Moon" last week, a supermoon which was the first full moon of spring. My connection simply came from being able to see my grass in the backyard at night a little easier. Initially, I was confused where they put this new street light, but then I did my homework. With this being the closest the moon would travel near earth, I was somewhat looking forward to 10:35 on April 7th. I'll come back to that.
Trying to understand the market
We have just gotten past Easter, and while I am one week away from my first year anniversary with PhytoGen, I have quickly learned that this means intended corn is going in the ground and there are the two or three producers who have most of their cotton in and looking at true leaves. The remainder of us are prepping fields and continuing to try and make plans, as we look to run wide open by the end of the month. With the exception of a few cool night time temps, we have had exceptional weather to get started. Temps have kept our soils warm enough for adequate germination, and rains have come through quickly, building soil moisture, and spaced enough that we can work in between.
My original intention this month was solely to focus on areas we can try and save a buck or two throughout the year, but I feel we need to understand the market the best we can now, before making decisions on budgets for the remainder of the year. I have tried to track commodity market trends and futures forecasts as closely as I can to gain an understanding of true expected price point when we get ready to sell after #Harvest2020. I'll be honest, I had to stop when prices got below 50 cents, as that was sickening -- almost a joke. I am in no way an economist, definitely stepping outside of my comfort zone, but I am afraid we all will be this year. One value we need to watch closely is the Adjusted World Price (AWP) of Upland cotton, announced each week by the USDA (USDA Upland Cotton Announcement). Low prices have trigged loan deficiency payment (LDP) for cotton. We have to keep in mind that taking this payment does not provide protection from a drop in AWP, but will be beneficial if prices climb within the year.
We also have to play close attention to short and long-term impacts of our current situation. US cotton supply estimations remain at 24.7 million bales, after an estimated 2019/2020 production of 19.8 million bales, 121.7 million bales globally. In April, we saw a record monthly drop in estimated world cotton mill use of nearly 6.5%, with overall forecast of 110.6 million bales, the lowest in 6 years. Raw cotton fiber also dropped close to 7% this month, down to 40.6 million bales, lowest in 3 years. During the monthly adjustment period, projected US cotton exports have seen the largest monthly reduction in recorded history. Albeit these drops, we remain the largest global cotton exporter and are still forecasted to export 15 million bales, which is 250,000 greater than 2018/2019, but with 6.7 million bales falling into carryover. Global stocks look to increase 24% over the previous high, while China, the world's largest importer, is seeing cotton stock leveling off, but at it's lowest in 8 years. This pandemic could majorly cripple both production and textile industry in China moving forward.
Cotton acreage is only expected to be down marginally in 2020 at 13.7 million acres. While acreage looks to be down in the southeast, delta, and western regions, the southwest region is indicating around a 4% increase in acreage according to National Agricultural Statistics Service. This is stil considered tentative, as many of these acres stilll may be planted to alternate crops and will be updated in June. A lot of indications point downwards to approximately an 18 million bale crop.
Changes in cotton gross domestic product (GDP) are highly related to spending on clothing and textiles, and as we know, this is certainly down right now around the world. We also see trends in the decreasing price of oil with competition to synthetic fibers, as previously seen in 2008. Now more than ever, we need to self-market our sustainably produced fibers to the general consumer. With demand down, China, the world's largest textile importer and industry struggling, added competition in the marketplace, and a large carryover looks to cap prices at the 2019/2020 US season average of 59 cents. However, with a decrease in estimated production, cotton futures for spring of 2021 point to reaching the upper-60 cent range.
While this bullish estimation won't be further validated until June reports and appears much more promising than where we sit today, upper 60 cent cotton is nothng to get excited about. While continously watching market trends to calibrate our budgeting, we are certainly going to have to utilize our dollars as effectively and efficently as possible. Again, my original intetions were to generate a season long checklist, but as the market remains fluid, so will our management decisions.
Considerations for Planning
Typically, I would always say the first decision to make is choosing your variety. Although usually I do find this to be the most important decision, I work for a seed company. I have to say that right? I feel in many cases, we need to take a backwards strategy in this market to select our variety. Let's look at previous year yield history across our farms. Where is my strongest and weakest area?
In those fields that are always consistently our best, I don't want to change much. Identify and cut some of those value-added products we aren't seeing defined returns on these acres, but stay consistent. Put the best variety on these acres that will make you the most cotton, and stay true in management to what has previously worked.
We need to be careful with decision making in our average-to-below-average production areas. Our first thought will be in cutting seeding rate. Stretching each bag just an extra acre to an acre and a half will give most folks anywhere from 12-20% cost savings in Central and East Georgia. The one concern with reducing seeding rate is often garnering the desired stand needed for optimum yield. Selecting a variety that responds to reductions in plant population and provides elite quality and emergence to ensure a stand in our first try will be critical. Again, call me bias, but very few will question the emergence and seedling vigor of PhytoGen cottonseed, and many of the varieties in our current portfolio truly respond if you thin them up a little.
Usually when reducing our population, we tend to delay maturity of that particular variety. We need to be aware of this in placement and harvest strategizing, but we also need to evaluate what we plan to put under that seed. The more we push our macronutrients, the more we promote rankness and delays in maturity. Selecting a variety with strong early vigor wll allow us to cut back or cut out our starter fertilizer rates. We may still look to push our earlier maturities, but can use the full season bloom capability of later maturities to offset reduced applications. These principles will usually hold true at all crucial application timings. Establish a budget based on yield goal and try to adhere to this strategy as we progress throughout the season. This may be a year that spoon fed applications of foliar products with nitrogen may truly pay off in a lot of instances. Long story short, we really need to do our homework on variety placement and physiological responses to different management strategies.
In regards to pests...
Are we fighting root knot nematode with nematicide? Again with the bias, but every PhytoGen® W3FE variety can save you the $30-40 an acre added cost from a in-furrow nematicide to target root knot nematodes. One other concern at planting may be thrips. This is one area we will really want to lean on our consultants, retailers, or other trusted advisors to devise a cost effective strategy to controlling this early season insect pest. We don't want to rely on seed treatment alone. Do we look to tackle before emergence, roll the dice and try to get back after emergence with foliars, or come up with a blend of the two? And similarly to thirps control, we will want to again lean on our retailers and consultants to generate a full season weed control strategy. Our pre-emergence herbicde program may be our most effective means of managing challenging weeds. I would look to spend a few dollars on a solid pre-emergence program up front and return these on the back end. We may have to look at a few weeds to turn a profit this year, but right now we have the beauty of family quarantine in the cotton field, and using the consistent efficacy of sharpened steel.
In coming articles, I will look to truly expand on some of these production strategies to try and maximize return on investment during the challenging market, especially once we get a clearer picture at what Mother Nature will provide this year. As uncertainty continues to weigh heavy on the shoulders of everyone in agriculture, we have to continue to remember that no one finds a way better for the light to shine through than the American farmer. We will weather the storms and come out stronger from these occurences.
The time is here. I walk outside, pan my camera to the sky, and visualize what I was capturing, I couldn't help but think of the similarities to this growing season. Clouds continously rolled past the big ball of light in the sky, making it seem not much different than any other moon. Coming out of the drought in 2019, cotton price climbing above 70 cents in mid-January, the trade agreement signed, early spring weather was looking very promising, a lot of optimism, and then the clouds (Corona, COVID, the virus, however you may phrase it) rolled in.
A couple days later, while talking with a wise grower and friend, he reminded me, "There really isn't such a thing as a normal year." This brought me back to my picture. No, my "pink moon" is not the norm. It doesn't look like everyone else's being shared online, but regardless of the clouds or the storm, the bright light still managed to push through. No doubt, there is a lot of pessimism, negative thoughts, uncertainty. One thing that is certain, if there is an industry that can weather this storm, it's the agricultural community. Constantly facing hardships and taking shots on the chin from those around us we work to feed and cloth.
Like 2019, there is no question 2020 looks to be more economically challenging. While the timing is in no way beneficial, we needed global trade to be corrected. Now while most vulnerable, it is very obvious the changes we need to make in manufacturing, processing, supply chain, marketing of goods, etc. Back-to-back years of this will certainly result in some planters not seeding and acres going fallow, but the light will shine through, and we will come out stronger because of this. "My coronavirus opening"
As I sign off this month, I mentioned a few folks have been rolling with cotton and have seed in the ground. As you continue to make your seed selections and decisions, I leave you with an example of the quality, emergence and vigor you can expect from PhytoGen cottonseed. See PHY 580 W3FE in Worth County, GA. Stand count to full stand in four days after planting. Subsequent photos within 14 days of planting. Select a quality variety you can trust to come up on first shot. We all know we don't need any added stress during these times.
For more information about cotton production practices in your area, contact your state Extension cotton specialist. As always, your PhytoGen cotton development specialist also is available to discuss agronomic options.
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