According to the President and CEO of Cotton, Incorporated Berrye Worsham, 2010 was the most unusual year he's seen in the last 25 years:
"Just to kind of give you a flavor of some of things that going on, as you know: prices for cotton are up sharply; we've had a year in which production was pretty strong; the demand began to recover in the United States as far as net domestic consumption; and the 2009 - 2010 crop year we also saw a pretty strong recovery in the world demand. Prices today are up to levels that we really haven't seen before and now cotton is successfully competing for land against corn and soybeans and even peanuts in the southeast.
Again, for the first time, we're seeing a lot of things positive happening for cotton. This is occuring after about a four or five year period in which we saw the opposite: cotton was experiencing low prices; we were seeing acreage moving out of cotton; demand was hit especially hard in this past recession globally - although it did recover. So, we've had quite a turn around."
To understand why cotton is where it is now, Worsham says you have to look back several years:
"2004 was a pivotal year in which the production of cotton greatly exceeded the demand. We just had tremendous yields worldwide that drove prices down. And what happened for the next several years, is even though demand was picking up for cotton, we had so much inventory the world just didn't notice the fact that even though inventories were high they were beginning to come down. So for four years in a row demand exceeded production. And then we had a dramatic change: we had quite a parity between production and consumption; inventories dropped substantially in one year; prices began finally to recover. And then this current year, we had this situation where we've had crop failures or crop disasters in Pakistan. China's production wasn't quite as high. And now the world has come back and said, 'You know what? We need some more cotton.'
And in this kind of environment when you have to get more cotton, you have to compete with crops like corn and soybeans and those prices have been through the roof, so cotton has joined the crowd. We've seen nearby contracts for cotton at about a $1.70. This is probably about a dollar higher than what we would consider to be, over the last ten years or so, "average or normal". The new price cotton is about a $1.15. We're likely to see increased acres in this coming year."
But Worsham says the cotton industry is likely to see challenges as a result of the recent dramatic increase in prices:
"For example, for every ten percent change in the price of cotton globally, you see about a little less than one percent reduction in demand. Now we're going to have a plus side, the economy is rolling along but we're going to see some impact because of high cotton prices, even though synthetic prices have gone up as well. The same thing is true in the US, there's such a dramatic and volitile nature of the price of cotton causing some retailers to maybe change blend levels... and that's going to create somewhat of a demand issue for us as we go into the next year. Typically, it takes about one year before these prices have an impact on demand. The good news is we're at such a high level, I think we can maybe, hopefully, we can change the base line level for the price of cotton so that they can be profitable levels going forward but I don't know that we can sustain $1.50 - $1.75 type prices."
Worsham says production costs will keep going up:
"I see that inputs are going to continue to rise, especially as prices have gone up. We have to do whatever we can to conduct research, to try to maximize the benefits of inputs, to get the greatest amount of bang for the buck. Cotton has some issues as far as, not just the growing of cotton, but the processing of cotton. One of the things that we're doing is a very extensive life cycle analysis - the most extensive ever done in cotton - to try to guage where our footprint is and what we can do in research to try to reduce that. I think it probably is going to be, again, in the processing: trying to reduce energy, trying to reduce water in the dying and finishing. But that is going to continue to be an important issue. Energy prices, I know, effects the growing of cotton but it also effects the processing of cotton as well. And our econometric work clearly shows that rising energy prices have a negative impact on the demand for cotton."
CEO of Cotton, Incorporated Berrye Worsham headquartered in Cary, NC