Bustos Law Firm

Sitting in high cotton or just high and dry?

In Agriculture, Contracts, Cotton, Landowners, Legal, Texas Law on April 18, 2011 at 9:11 AM

There is no secret that the South Plains region is the largest cotton producing region in the United States.  Cotton itself accounts for around 35% of total world fiber use. Cotton is produced by some eighty countries; however, the U.S., China, and India combined produce over two-thirds of the world’s cotton, the U.S. being the third largest cotton producing country. Cotton is at least a $25 billion industry and accounts for over 200,000 farm and textile jobs.

 During the growing season, cotton farmers execute contracts to sell their cotton.  The buyers then trade and sell this cotton to manufacturers on an open cotton market.  As of late, the cotton market has been volatile. Supply has been driving the market price to all-time highs. Raw cotton prices have risen to record levels while global cotton consumption, according to the USDA, is projected at 117.1 million bales. At the beginning of March 2011, the USDA estimated that prospective cotton plantings would be approximately 12.6 million acres. That is a 1.6 million acre or 15% increase above 2010 levels.  Globally, cotton production is anticipated to rise 13%.

 The current market price of cotton, coupled with tight supply, might lead some to believe that there is considerable interest by producers to plant cotton this coming year. This may also prompt cotton farmers to sign contracts that appear to be advantageous.  The contracting process, however, is filled with numerous potential obstacles.  Mother Nature is forever fickle and so far this year is not cooperating. Anyone who has been in the South Plains this spring can smell, and when the wind is up, taste the dry dirt in the air. In fact, this spring has been the warmest, driest and windiest spring since 1917.  With little to no subsurface moisture, there is a risk that this fall’s cotton crop may suffer.  A farmer looking at a contract needs to be aware of how the weather impacts the cotton growth and how that may impact the figures in a sales contract. 

 Since cotton contracts often involve some speculation about the overall crop, if Texas’ anticipated cotton production is lowered due to lack of moisture, which causes farmers not to plant, the high market prices are here to stay. This phenomenon, which is a potential with this year’s crop, also impacts the sale of cotton and a farmer’s contract.  In addition, factor in weather and instability around the globe and you have the makings for a perfect storm that will culminate in continued market volatility and high prices.

 The speculative cotton futures figures, which play a pivotal role in cotton sales contracts, have wreaked havoc at all levels of the industry. Cotton buyers oversold and production levels were below the estimates last year. This has caused litigation to blossom between producers and buyers. Moreover, buyers are tightening up their contracts for the coming crop year making it almost impossible for producers to contract their estimated cotton production because if they can’t plant due to a lack of rain, they still have to deliver their estimated production.  Thus, greed will drive many producers to the point of insolvency.  In light of all these factors, farmers faced with cotton sales contracts should pay particular attention to the speculative nature of crop estimation, and determine whether or not they can deliver and whether or not their buyer is in a position to live up to their end of the bargain.

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