Episode 99 - Global Cotton Mill Use at a Six-Year High

Hunter Biram and Ryan Loy dig into why global cotton mill use is projected to reach its highest level since the 2017/18 marketing year, the fourth consecutive year of growth. They explain how the gain is concentrated in China, India, and Pakistan, which together account for nearly 75 percent of this year's increase, and why demand happening thousands of miles away shows up in the price an Arkansas producer sees. Ryan unpacks how rising crude oil prices have made cotton more competitive with polyester, and how tighter supply is pushing world ending stocks to their lowest point since 2018/19. They close on what stronger demand and a projected 73-cent season-average price could mean for cotton growers heading into the new marketing year. 

Transcript

Dr. Hunter Biram 0:00

World cotton mill use is projected to reach the highest level since 2017-18 marketing year and would be the fourth consecutive year of growth. The gain is concentrated in China, India, and Pakistan, which represent nearly 75% of this year's global increase. Rising meal demand is projected to push world-ending stocks to their lowest level since the 2018-19 marketing year. That and so much more on this episode of Morning Coffee and Egg Markets. Well, with me today, I've got my good friend and colleague and a familiar voice on the podcast, Dr. Ryan Loy. Ryan, how are you?

Dr. Ryan Loy 0:44

I'm doing great, Hunter, and it's uh great to be here today. Glad you're able to get back last night and back in the office today.

Dr. Hunter Biram 0:51

I really am glad to be back in the office. I mean, trap travel's fun, and this was a very important trip. You know, this was the SRMEC Advisory Council meeting and the risk management conference that happens every August. And it was a really good meeting. Really glad that I did that. I appreciate you being available on Zoom to help me out with some of that programming on crop insurance. But you know, there really is no place like home at the end of the day. Those are good conferences, good meetings, very productive, but there really is no place like home. Ryan, we are recording episode 99 today. It's crazy.

Dr. Ryan Loy 1:22

Crazy. I can't I can't wrap my head around it.

Dr. Hunter Biram 1:25

Episode 99, and we should be recording episode 100 next week, and that should be the August WASDI. So I just can't think of a better way to commemorate the 100th episode than with a WASDI episode with Scott Styles. I think that's just quintessential.

Dr. Ryan Loy 1:42

Yeah, that is perfect, and I'm looking forward to that. And I can't believe it's been a hundred episodes. It's been a great journey, and I I'm excited for a hundred more. 100 more.

Dr. Hunter Biram 1:52

Let's do it. Well, today we're talking about record global cotton mill use and not just for one year, but for four consecutive years and uh what that means for a farmer's bottom line. So to get us started, you know, for an Arkansas farmer, why should mill activity happening in China or India or Pakistan matter to their bottom line?

Dr. Ryan Loy 2:12

Well, really, it's when you think about the balance sheet of cotton, when we look at mill use and what mill use is, it really is just the demand side of that global cotton balance sheet. So you think about we've got the supply side, how much production is being, you know, created. Then we look at the demand side, what's being used, and that's mill use. You know, again, it's that fiber that's actually getting spun as opposed to, you know, fiber piling up in a warehouse. That's the idea here. Um, in terms of the mill use. So when mills overseas are running more bales, you know, there's a real consumption pulling on that world supply. And a meaningful share of that fiber has to come from exporters across the world, including the US. And so, you know, even though that mill may not be in the US, could be thousands of miles away, like as we're talking about here, stronger mill use overall, you know, is one of the more direct kind of demand signals that eventually show up in the price that a producer will see at the gin or forward contract.

Dr. Hunter Biram 3:08

And we face a global market really in all of our crops, but you know, cotton is a global market for us in the U.S. U.S. cotton demand is driven primarily by exports, where you have 12% is gonna be domestic mill use. And that means that 88% of U.S. cotton demand is gonna be from exports. So to your point, like we really do want to know what's going on in China and India and Pakistan, who are gonna be the biggest importers among the places where we're gonna send our cotton. So yeah, no, 100%. So we know that the growth is concentrated in these countries that we've mentioned. So what's actually within those countries, what is driving their mill use?

Dr. Ryan Loy 3:50

Well, when you think about what role those countries play in the global apparel market, um, it starts to kind of make a lot more sense, right? When we think about, um, we look at the tags on our clothes sometimes. But China's mill use is expecting to climb to its highest level since about 2020. And again, it's gonna during this time, and while it's increasing, it's still remaining the world's largest supplier of those apparels, right? They're gonna import that cotton, spin it, or mill it, whatever the proper terminology is, and then they're going to export that out to the global market, you know, back here, back to other countries. So its milling activity tends to move with both, you know, their own domestic demand and then its export apparel demand as well. Um, again, and with you know, the world economy always, you know, as it stands now, growing, you know, year over year on a global scale, you know, that demand will is is always at least there at a level playing field, if not more, uh, than other years. You know, India, on the other hand, is essentially matching its 2020 record. So it's not beating that record, but it's essentially about the same uh 2021, 20 or 2020, 21 marketing year. Um, on the other hand, Pakistan is kind of rebounding. They had a nine almost a million bail drop last year in both Pakistan and one country have it mentioned up to this point, Bangladesh, are actively working to grow their textile and apparel export business. When you think about it, again, when you think about these four countries, they're all trying to, you know, compete, right? They're gonna export those apparels and they're gonna compete on that front. And so um, if it becomes a we look at these countries, they account for about 75% of the entire global increase in mill use this year. And so it's very, very significant. You know, it's not a uptick everywhere necessarily, it's a handful of these major countries that are trying to compete on that export business side, uh, really in terms of apparel.

Dr. Hunter Biram 5:37

But it's safe to say that the increase is in the biggest importers.

Dr. Ryan Loy 5:42

That's right. That's right.

Dr. Hunter Biram 5:44

Which is important. So, like while not every country is experiencing this increase, the biggest players are importing more, and that's particularly important. So we hear that cotton is becoming more competitive with polyester. So, one question that I've got is can you impact why crude oil matters to a cotton farmer and maybe even talk a little bit about why the Iran conflict is still relevant with this?

Dr. Ryan Loy 6:07

Absolutely. You know, all of this kind of play goes hand in hand with each other. And so when we think about what are the biggest things that cotton's been competing against in recent years has been synthetic fibers. You know, I know some shirts that even I own, um, you look at them and they're 50% polyester, 50% cotton, or you know, majority polyester, whatever it may be. So it's be it has been um, you know, a competitor for cotton for a long time. However, polyester and some of these other synthetic fibers are made from petroleum. So their cost, you know, tracks the cost of that input, the polyester, that input to actually, you know, spin it into apparel, tracks really close to the crude crude oil prices. And as we all know, crude oil has moved up sharply in 2026, making those synthetic fibers more expensive relative to cotton, right? It's kind of like that idea of substitutes that we've we've learned about for years. You know, it's it's they're gonna substitute to cotton because right now it's the cheaper product to mill. So they're going to choose that instead of one that tracks with crude oil, which again, thinking about the Strait of Hormuz, which is a significant part, you know, about one-fifth or twenty percent of of the world's oil moves through there. And so when you think about that, if that is going up, polyester is gonna follow and these mills are gonna go to a cheaper substitute as it currently stands, or a more stable price substitute, because cotton does not track as as much with uh oil. So when you kind of look at this, you know, putting these trends together, cotton becomes that relatively cheaper, more attractive option for mills, choosing which fiber to run again, and that's gonna support that mill demand for cotton separate from you know whatever's really happening from the overall apparel demand. So, you know, apparel demand can stay flat, but if the idea is that they need to produce, you know, and mill the cotton, they're gonna shit to that cheaper substitute, and then that's going to increase demand so they can build up the stocks of that over time.

Dr. Hunter Biram 8:01

So it sounds to me like everything is, I mean, that you're talking about it, it sounds fairly bullish. And, you know, the July WASD would seem to reflect that as well, because it bumped the season average price forecast up 10 and a half cents from the last marketing year for 25.26 to 73 cents a pound. So I got a couple questions here. You can answer them in whatever order you want, but how much confidence should a producer put in that number holding or kind of hovering around that 73 cent mark? And really at the end of the day, like what does profitability look like under 73 cents versus the 62 and a half cents that it was?

Dr. Ryan Loy 8:34

So, really, when we think about this, you know, that 73 cents pound figure is about, you know, USDA's current best estimate. When we look at this, really what's driving it, it's going to be that demand, that demand side, that mill use. And so when we think about the four largest exporting on terms of the apparel side, importing in terms of the cotton side countries that we've talked about here, as long as they maintain, you know, this expectation of continuously having that demand and continuously running cotton, those prices will follow, right? You know, it could shift in terms of, you know, again, if we're looking at the Strait of Hormuz, this I I don't expect this necessarily to happen, but let's say that everything gets fixed today and the price of oil plummets, right? You know, then at that point, maybe synthetic fibers become the more cost-competitive option again and they switch over. But if oil prices stay kind of elevated, the strait stays closed, I believe this will continue and kind of give good confidence that there will at least be some of that upward pressure on prices because of this demand. And really, another reason is because our supply is low. Um, we haven't talked about this yet, but you know, when we look at our ending stocks, they're projected to fall about five million bales from the previous year. So we're dealing with a lower supply, right? You know, it's not a it's I mean five million bales is a lot in the general scheme of things, right? But when we look at this, we have a low supply, we have an increasing demand to one that maybe we wouldn't have expected to uh have at the beginning of the year. And so when you kind of put those two fundamentals together, you're looking at some upward pressure on prices. In terms of profitability, I went ahead and consulted our national cotton profit loss calculator, a little shameless plug there that we've talked about before on the show.

Dr. Hunter Biram 10:16

Link will be in the newsletter.

Dr. Ryan Loy 10:17

That's right. Yep. And so I went ahead and just made a choice of Arkansas and Dechey County. And so when you look at this and taking some assumptions, right? So we're gonna assume that the lint percentage is about 44%, the cotton seed price is about $220 a ton. So we have to assume those things. Then I'm also assuming an 80-20 crop share arrangement as well. So those are the assumptions I have. When we look at about that 73, 74 cents a pound uh kind of range right now, you're still in the red up to about 1,400 pounds of cotton lint uh field yield coming out of there. And you switch to about a positive $20. So assuming taking all of our assumptions into case, you can kind of treat that as at least a break-even. Now, when we kind of look at this same scenario with the with the prices that we had earlier this year and that we talked about, some of those uh, you know, mid-60s cents range, you're losing anywhere from about $140 to $60. So you're in the red that amount. So when you think about at this point, we can definitely confidently say it's it looks better. I wish it did look a lot better because you know, breaking even versus profitability, right? And the more yield that you can obtain on the in the field, the better that picture becomes. You know, about 1,500 pounds an acre, about $112 in the black at that 74 cents a pound. It's about about 1,600 pounds per acre, you're looking at about 207 in the black. So it gets better the higher the yield is. And I know that this is, you know, an assumption we have to make at the county level, and not everybody's farm yields are the are the same. But when you kind of look at this overall, uh, the picture starts to become a lot better.

Dr. Hunter Biram 12:01

And so for those who do not live in Deshay County, Arkansas, even if you're not even from Arkansas, this is a national tool. So you can go to your county, and we've already populated. I say, wait, Ryan did all the work, y'all. Like Ron did all the work, and and Evan, his program associate, they put in all the state extension budgets in this tool. And we've also put in all the county yields, I believe, from the risk management agency, the RMA County Yields. So you can get a a pretty close number to your county. So if you're not into Shea County, uh, but maybe you're in Bolivar County, Mississippi, or maybe you're in Chico County, Arkansas. But we I would encourage you to uh check out your county to see what those returns look like. And if you really want to get technical and get savvy with it, you can change your inputs. If you know what your budget is, you can go in and change those line items to get a pretty good picture as to what the profitability looks like uh in the upcoming marketing year. So with that, Ryan, do you have any other thoughts?

Dr. Ryan Loy 12:57

No, I think we covered a lot today. Um, you know, I think uh one of the things I as an anecdote that I think is interesting is that nobody likes high gas prices, which of course are from the high oil prices. But in this instance, it's a good thing that we have high oil prices because we've got some demand for cotton. And so, you know, supporting some of the cotton farmers and again, I know on the input side that does not help, but hopefully some of this uh upward pressure in prices can really be a welcome relief.

Dr. Hunter Biram 13:24

Yeah, you know, and unfortunately, the the truth is in economics, like we always have winners and losers when these kind of events happen. And the winner and loser could be the same person. Yeah, that's right. It's uh it's just really hard to navigate these markets, but it is important to know what's moving them and what's moving prices, and uh so that we can better manage finance and that we can better manage risk. And so with that, Ryan, I thank you so much for your time this morning. And yeah, look forward to having you on again very soon. Awesome. Thank you, Hunter. All right, y'all stay tuned for the market report. Thank you.

Dr. Ryan Loy 13:57

Hello, everyone. This is Ryan back with your market report. September 2026 corn is currently pricing in at $4.39 a bushel. This is up from $4.38 a bushel a month ago and three dollars and eighty cents a year ago. December 2026 corn is currently pricing in at $4.62 a bushel, up from $4.58 a bushel a month ago, and $4.01 a year ago. Looking at September 2026 rice, currently pricing in at $14.19 per $100 weight, that's up from $13.27 a month ago and up from $12.52 a year ago. November 2026 rice is currently pricing in at $14.62 per $100 weight. That is up from $13.63 a month ago and up from $12.70 a year ago. November 2026 soybeans are currently pricing in at $11.78 per bushel. That is down from $11.92 a month ago and up from $9.85 a year ago. March 2027 soybeans currently pricing in at $11.93 a bushel. That is down from a month ago from $12.06 a bushel and up from $10.03 a year ago. December 2026 cotton is currently pricing in at about $0.83 per pound. That is up from a month ago, 78 cents a pound, and up from 66 cents a pound a year ago. March 2027 cotton is currently pricing in at about 85 cents per pound. That is up from 79 cents per pound a month ago and up from 68 cents a pound a year ago. Looking at July 2027, wheat is currently pricing in at $6.77 a bushel. That is up from $6.06 a month ago and up from $5.71 a year ago. US weekly average for peanuts are currently pricing in about $426 a ton. That is up from $424 a ton a month ago and down from $524 a ton a year ago. Current Mississippi River readings at Memphis is about negative one foot, just around there. And a year ago, that was at a positive 9.6 foot. Arkansas Highway diesels currently pricing in at $4.94 a gallon. A month ago that was $4.30 a gallon. And a year ago, $3.40 a gallon. So up significantly from a year ago. Arkansas Farm Diesel is currently pricing in at $4.08 a gallon. A month ago that was $3.50 a gallon. And a year ago, $2.46 a gallon. Switching over to weekly fertilizer prices, kicking it off with urea, which is currently pricing in at $575 a ton. A month ago that was $565 a ton. And three months ago, $811 per ton. Ammonium nitrate is currently pricing in at $420 a ton. That is down from a month ago, $474 a ton. Three months ago, $578 a ton. And a year ago, $435 a ton. Ammonium sulfate is currently pricing in at $478 a ton. $507 per ton a month ago, and $535 per ton three months ago. DAP is currently priced in at $915 a ton. A month ago that was $923 a ton. Three months ago $891 a ton. And a year ago, $855 a ton. Triple superphosphates currently priced in at $833 a ton. A month ago that was $805 a ton. Three months ago, $791 a ton. And a year ago, $765 a ton. Potash is currently pricing in at $453 a ton. A month ago, that was $457 a ton. Three months ago, $448 a ton. And a year ago, $463 per ton. This has been your market report. Thank you so much for tuning in and have a great day.

Dr. Hunter Biram 18:06

If you would like to learn more about the Fryer Price Risk Management Center Vexless, we encourage you to go to Fryer, F R Y A Risk, R-I-S-K-Center dot u a d a dot edu. If you want to check out the newsletter that is associated with this podcast, we encourage you to visit the website and check out podcast newsletters. When you go to podcast newsletters, you should be able to see the most recent newsletters that we published. And within each one of those newsletters, you should be able to click on a link to subscribe if you haven't subscribed already. Thank you for tuning in and we'll catch you next time. Bye bye.