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VOL. 126 | NO. 236 | Monday, December 5, 2011

Still the King

Large crop helps local cotton market remain vibrant despite recent price dip

By Andy Meek

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The Mid-South region is on track to produce 4.8 million bales of cotton this year, the largest crop of the fluffy white fiber since 2007.

That’s according to figures from the U.S. Department of Agriculture cited by Gary Adams, vice president for economic and policy analysis with the Memphis-based National Cotton Council. But that only tells part of the story of the white gold that’s long been a part of the story of Memphis. History books clearly paint a portrait of Memphis as a city once known as a river town with a thriving cotton trade and as a town that teemed with cotton merchants who once made Front Street the South’s version of Wall Street.

The crop at one time gave the city the colorful series of parties and events known as the Cotton Carnival that became Memphis’ version of Mardi Gras. Other mementos of the past still swirl like cotton lint around the city, everything from the now one-man trading operations here to the National Cotton Council, based in Cordova. Today, the cotton industry also is heaving in the wake of the technological advances and price volatility that have reshaped many large chunks of the economy. Figures from the Memphis-based cotton trade group show the cotton market has a roughly $6 billion economic impact on the Mid-South. And despite a significant price dip this year, cotton remains one of the area’s top sectors in terms of exports, according to the Greater Memphis Chamber.

Even so, a mix of forces that at first glance might appear contradictory is controlling the market presently – but probably won’t rattle King Cotton’s throne too dramatically. Price trends help reflect what’s happening. Last year, cotton prices rose 93 percent between mid-July and early November, according to FTN Financial chief economist Chris Low. Prices spiked so sharply last year that Investor’s Business Daily speculated that the higher prices, along with higher labor and shipping costs, signaled “apparel inflation” for 2011.

Adams said that trend was visible as far back as 2009. Worldwide cotton demand began to recover after the dip it took during the recession, which means demand began to bounce back at the same time the crop harvested in the fall of 2009 was the smallest harvested on a global basis since 2003. Thus, some of what’s happened in the market can be attributed to the economic principle of supply and demand. Those trends continued through 2010 then began correcting themselves this year.

“We did hit a historic high earlier this year back in March, when we briefly went above $2 a pound,” Adams said. “Now we’re on the December contract, and it’s trading between $1 and $1.05 a pound. So prices declined substantially as we went through the summer months.”

He said the price drop can be attributable partly to the demand high prices put on end users earlier in the year, like those who buy cotton and turn it into products.

“It really causes some rationing of demand,” Adams said. “We had some textile mills that certainly reduced their demand of cotton maybe trying to shift in more polyester and other things relative to the amount of cotton they were doing.”

The supply and demand factor can come into play when planters look at price trends and decide to cut back on their next cotton crop.

“Another force supporting cotton prices are prices for crops that compete for cotton acreage,” reads the most recent monthly economic letter from Cotton Inc., another trade group. “Ratios based on new crop futures for cotton relative to those for corn and soybeans … suggest that cotton prices are less attractive than they have been the last two years.

“As a result, there may be reason to expect a decrease in cotton acreage in 2012/13 despite New York futures values near 100 cents/lb. If acreage forecasts released in February support the notion of lower cotton acreage next crop year, there could be additional support for cotton prices in later months.”

Most growers plant cotton as a rotation of a variety of crops, Adams said. If cotton prices don’t look as attractive once the growers come out of winter and start trying to decide what their next allotment of acreage for crops will be, Adams said they may respond to those price signals and cut back on cotton planting.

“By historical standards, when we talk about today’s cotton being roughly a buck per pound, that’s still a relatively high price compared to three, four and five years ago,” Adams said. “During that time, cotton would have probably been closer to between 60 and 65 cents per pound. I think the issue when we look at question marks around cotton right now is on the demand side. I do think there’s still some uncertainty on the consumer side, because the economy’s not doing well, and I don’t think consumers are that confident right now. So I think the demand side still has some question marks. A sluggish economy does not help.”

PROPERTY SALES 0 133 1,342
MORTGAGES 0 131 1,047