The rain showers that are improving the condition of Ronnie Hopper’s cotton fields in West Texas are also washing away his chances of making a profit this year.
It’s not like the moisture isn’t welcome, especially after three years of drought-depleted reservoirs. But with a global glut of cotton that began in 2011 and prices in a bear market, the wet weather signals better yields in the largest U.S. growing region. For farmers such as Hopper, that means figuring out how much they must produce to break even as prices drop.
A bigger harvest in the U.S., the largest exporter, will add to global inventories that by August will be almost equal to a year of consumption. The surplus, enough to make more than 18 tee shirts for every human being on the planet, is expanding even as farmers cut back output because China, the top buyer, is importing less. New York futures probably will drop to the lowest since 2009, a Bloomberg survey of analysts show.
“I’m optimistic about the production side of it, but I’m not optimistic about the price,” Hopper, 68, said by telephone from Petersburg, Texas, where fields got as much as 8 inches (20 centimeters) of rain in the past two weeks. “Even with a good yield, there’s not much money to be made in cotton.”
Hopper, a fifth-generation farmer who manages about 3,000 acres with his son, Ronnie Jr., said he will plant less cotton this month -- maybe as little as 300 acres, which would be the smallest percentage of his crop land that he can remember. With cotton prices already near or below his cost of production, he’ll increase planting of other crops, including corn and hay.
Prices already are down 29 percent in the past year to 65.08 cents a pound at 9:24 a.m. on ICE Futures U.S. in New York, and the slump probably will continue. Cotton for delivery in December, after the harvest, will slide 14 percent further to 56.55 cents, according to a survey of nine analysts.
“This latest round of rains has boosted the chances for an above-average crop,” Peter Egli, the Chicago-based director for global merchant Plexus Cotton Ltd., said in a report May 7.
Cheaper cotton is reducing costs for clothing makers including Perry Ellis International Inc. and Levi Strauss & Co. Every 1-cent change in prices implies as much as a $3 million impact in the cost of goods sold for Hanesbrands Inc., the Winston Salem, North Carolina-based underwear maker estimates.
While the slump is good for buyers, it hurts growers in West Texas, who need 65 cents to 75 cents a pound to break even, said Shawn Wade, director of public policy and research at Lubbock, Texas-based Plains Cotton Growers Inc., the state’s biggest producer group. Globally, it costs $1.50 on average to produce a kilogram of the fiber (68 cents a pound), the International Cotton Advisory Committee estimates.
The prospect of losses means the glut may not last. Global planting will decline by about 7 percent this year, with output dropping 9 percent to 23.9 million metric tons in the 12 months that start Aug. 1, Washington-based ICAC forecasts. Harvests have already declined in India and China, the biggest producers, U.S. Department of Agriculture data show.
Rabobank International predicts that the drop in supply will create a production deficit in 2016, the first in six years. Stockpiles monitored by ICE have slumped 74 percent in the past 12 months.
While the market is well supplied now, “that balance sheet will be tighter” next year, reducing inventories and exports of good-quality cotton, Tracey Allen, an analyst at Rabobank in London, said in a telephone interview April 29.
Even with less output, slowing demand may keep prices low as the global economy sputters, said John Bondurant, the president of Memphis-based Bondurant Futures Inc., who’s been trading cotton for 52 years.
ICAC estimates demand growth will expand 1.7 percent next season, down from 2.4 percent in the 12 months that end in July.
China, which has accumulated record stockpiles through a government program to support farmers, wants to reduce its stash. That means more domestic supply and imports dropping as low as 5 million bales next season, according to Plexus Cotton, which is based in Liverpool, England. That would be the smallest since 2003, USDA data show.
With U.S. inventories already forecast to reach a six-year high before the 2015 harvest, the Texas rains are increasing prospects for next season’s crop. Fields are in the best condition since at least 2007, when yields reached a record, according to Wade of Plains Cotton.
“Cotton is hopelessly bearish,” Shawn Hackett, president of commodity broker Hackett Financial Advisors in Boynton Beach, Florida, said in a telephone interview April 30. “We have large stocks, and it will take years to bring them down, and with the global economy struggling, that won’t happen next year.”