Subsidy Bailing Out U.S. Cotton Exporters
In the cotton industry, there’s nothing like a little government intervention to turn around a business.
As recently as September, “mill consumption was just the blahs,” said Jarral Neeper, a vice president at Calcot Ltd., a cooperative that sells cotton for 2,200 California and Arizona farmers. “They call and ask for an offer of cotton, you offer a price, and they’d come back and say, ‘Sorry, it’s too expensive.’ ” Cotton from China and Uzbekistan was cheaper.
That’s what prompted the U.S. to step into the $4.3-billion U.S. cotton market with some cash to jump-start the ailing domestic industry.
Sure enough, U.S. cotton’s prospects have turned around. Weekly exports since Oct. 1 are more than six times what they averaged in the previous nine months.
Business is better for cotton exporters, such as Calcot, which sends about 1.6 million bales of cotton a year to more than 30 countries. While prices still are close to a 13-year low, farmers and exporters are finally seeing improved demand for “white gold,” a name cotton earned in World War I when it was used to make military uniforms and parachutes.
Average weekly exports had plunged by 63% beginning last December, after a 13-year-old subsidy program ran out of money more than three years before it was supposed to. The subsidies are intended to help U.S. textile mills and cotton exporters use more expensive domestic cotton instead of imports.
While the revival of the government subsidy last month has yet to pump life into cotton prices, it is resuscitating demand for the nation’s fifth-biggest crop.
“We’re now selling cotton in Taiwan, Hong Kong, Indonesia again. Virtually every sale we’ve put on the books is a direct result” of the subsidy, said James Echols, president and chief executive officer of Hohenberg Bros. Co. in Memphis, Tenn., one of the top three U.S. cotton exporters.
The subsidy program was restored, retroactive to Oct. 1, as part of the $8.7-billion farm bailout that President Clinton signed into law Oct. 22.
Under the 1985 program, subsidies are paid both to U.S. cotton exporters and to domestic mills to make up the difference between world cotton prices, now about 46 cents a pound, and U.S. cotton “spot” prices in Europe of about 54 cents. Adjusting for quality differences, the government pays a subsidy of about 7 cents per pound.
Exporters such as Calcot, Hohenberg or Dunavant Enterprises benefit by using the subsidy to lower their selling price. “It doesn’t make the sale more profitable. It allows us to do the volume, and that’s key,” said Robert Joseph, president of International Cotton Marketing Inc., a Lubbock, Texas, exporter.
Domestic textile companies, whose returns fell 29% in the past year, as measured by the Standard & Poor’s Textile Index, get the same subsidy as exporters each time they open a bale of U.S. cotton.
WestPoint Stevens, the biggest U.S. maker of linens, towels and comforters, typically uses about 300 million pounds of cotton a year, said Bryan C. Hunt, a textile analyst at First Union Securities Inc. in Richmond, Va.
At today’s rates, that would mean $21 million in subsidy payments, or about 1.2% of the company’s 1998 revenue of $1.8 billion. “Payments could materially reduce cotton costs well into calendar 2000,” Hunt said.
Prices have fallen because the world is awash in cotton. World prices sank to a 13-year low this month, in part because many nations in Asia, where major textile mills import cotton, still haven’t recovered from recession. Weakness in Russia and Brazil also has curbed demand.
Cotton for March delivery closed Wednesday on the New York Cotton Exchange at 51.51 cents a pound, down 0.02 cent, though 6.3% above the 13-year low of 48.45 cents it reached on July 12. On Dec. 15, 1998, the day the subsidy program ran out of money, cotton closed at 61.27 cents.
At the same time, the harvest of U.S. cotton is 19% bigger than a year ago, and supplies of unsold U.S. cotton will be the largest in seven years. U.S. exports are estimated at 5.7 million bales.
U.S. textile companies are buying less cotton, partly because of a fashion shift away from the fiber. U.S. mills are forecast to use 10.2 million bales of U.S. cotton for the current marketing year, which ends July 31, down 2% from a year earlier and 10% from two years earlier.
“The theory is that the program helps move cotton in the market,” reducing supplies and raising prices, said Larry Mitchell, deputy administrator of the U.S. Agriculture Department’s farm programs division. Prices haven’t risen much, and USDA questions whether they will.
“Our analysis indicates” that the subsidy program “has had minimal impact” on raising prices or exports, said J. Lawrence Blum, who oversees USDA cotton programs. Subsidies could lift U.S. exports by 5% this year, or an additional 1% of world exports, Blum said in a speech.
Even so, the National Cotton Council says the program is needed to spur demand and “help our industry cope with the difficult economic conditions it is mired in today,” said F. Ronald Rayner, the trade group’s president.
The new law renewed the subsidy program through July 2003.
