The Global Cotton Supply Chain and the Massive Disruptions
In 2018, Paul Bush was appointed President and CEO of Calcot Ltd., the Far West's oldest cotton marketing cooperative. He is only the 8th chief executive in the cooperative's 95-year history.
Bush has worked in the Arizona cotton industry since 1990 which included serving as an accounting manager for King Ranch's Arizona Agribusiness Operations and a gin manager for Chickasha Cotton Oil Company.
A horse enthusiast along with his wife, Nancy, Bush earned a bachelor's degree in agricultural economics from the U of A in 1989 and resides in the Phoenix area.
I’ve known Paul for decades and recall often interacting with him over the years on ag and cotton-related matters. One thing is certain, He and his board are focused on global markets and how to maximize markets on behalf of our western cotton growers.
Arizona Agriculture: The food and ag supply chain hiccups are daily evident especially when we see empty store shelves. But how have these supply chain hiccups been impacting the cotton industry?
Bush: The short answer to the question is that the impact has been disruptive, nerve-racking, and market-shaking. The pandemic started the disruptions with worldwide lockdowns, which closed or limited access to major ports and created large inventories. Industries liquidated these inventories to generate cash to survive during the pandemic due to lower demand for product. When the pandemic eased and people started buying again, often fueled by government stimulus packages, markets had to reset from supply-driven markets to demand-driven ones. During all this chaos, freight vendors were cutting capacity during the pandemic and then having to re-staff and add assets once goods started to flow again. This created a perfect storm in the logistics industry; demand for freight, whether it was for trucks, rail, or ships, simply exceeded the capacity that was available which in turn created higher shipping costs and the inability to move cargo in a timely basis.
If there was a bright side to all this in the cotton industry, it was that these disruptions were, and are, worldwide and no country was immune. Textile mills all over the world have been screaming for nearby delivery of product. It doesn’t matter if it’s coming from Australia, Brazil, or the United States; there simply isn’t enough shipping capacity to get the product delivered on a timely basis. We’ve had customers cancel sales because they couldn’t receive our cotton on a timely basis, but on the flip side, we’ve been able to take advantage of situations where our competitors were in the same situation, and we were able to make the sale. I’ve been involved in the cotton business for more than 30 years and have never seen anything like it.
Lastly, the demand for freight and product has been so excessive that it created a disruption in the cotton market. We usually see what cooperatives and merchants call “carry” in the market, where nearby futures prices trade at a discount to more distant months. This allows traders to roll futures contract hedges at a gain when sales can’t be made in the nearby month. Logistics issues have created the inverse of this, whereby the nearby contract is trading at a premium to the distant months. This indicates that buyers need and prefer to have the product now, versus sometime in the future. If you can’t make a sale due to logistics concerns, you’re forced to roll your nearby hedges at a loss to the next contract month. This issue has created some of the volatility we’ve seen in our market.
Arizona Agriculture: How has CALCOT mitigated the increased transportation costs, labor availability, rising energy costs, and other challenges?
Bush: I wish I could say that we were able to pass these costs on to our buyers, but unfortunately marketers of agricultural commodities are generally price-takers, not price makers. When we make a sale, we settle on a price that factors in assumptions for transportation costs. With cotton, most cooperatives and merchants price cotton landed at the port in the country where the end user is located. This is generally because we have our own logistics staff or network that is knowledgeable about international logistics and trade finance, whereas textile mills generally do not. So, as mentioned, we make these sales based on cost assumptions at the time, which are factored into the sale price. However, most sales are made with a forward date for shipment, typically within 30-90 days. If transportation costs are higher at the date of shipment than the amount that we factor into the sale, we must eat those additional costs.
The only way we’ve been able to mitigate these costs, to a lesser extent, has been to try to sell cotton to markets where transportation and logistics costs aren’t as high. This has proven to be difficult, as there have been reasons why we haven’t sold to these markets in the past, which usually involve additional credit or default risk or fewer international trade finance options. Also, many markets like Mexico and Central America, which have lower freight costs for us, have not been utilizing higher grade cottons that are produced in Arizona as typically these markets were for denim yarns. Things are starting to change on this front, however.
We’re seeing a few Chinese firms taking interest in partnering or acquiring textile mills in Mexico because of the forced labor issue in Xinjiang Province, which has essentially stopped all imports of textile products from that region in western China from entering the United States. By having operations in Mexico, Chinese firms can source sustainable U.S. cotton cheaper as well as have unhindered access to the North American market. The Xinjiang issue is a game-changer, particularly for U.S. Pima cotton. We’re seeing some new mill activity in Mexican states like Sonora and Sinaloa for the production of higher count yarns which could become a good market for Far-West cottons in the future. Historically Mexican textile production has been in central and eastern Mexico with preferences for Texas cottons.
Arizona Agriculture: Ron Rayner said: "Our cotton marketing cooperative, Calcot, has created innovative ways to get our cotton in containers and delivered to the port when a ship is available." Can you talk about this?
Bush: I know what Ron is talking about and I can’t divulge much without getting into proprietary information. He’s referring to things we’ve done to get cotton to a west coast port, be it Los Angeles or Long Beach, when we’ve been able to get chassied containers when other merchants and coops couldn’t.
Part of this is due to the location of our warehouse assets in Glendale and Bakersfield, but much of it is also due to the long-time freight vendor relationships Calcot has had with a few locally based trucking companies. It’s no secret that some of the first loads handled by a couple of large trucking firms in Phoenix were Calcot loads going to Los Angeles.
We also have a long-standing relationship with a Buckeye-based container carrier. These relationships have been like a marriage, with many ups and downs. But the key to these relationships, just like a marriage, is that we view these relationships as partners. Many merchants view trucking companies simply as vendors. We have a different philosophy than that and it has served us well in our 95-year history, particularly when a microburst in 2015 destroyed half of our warehouses in Glendale, and we were forced to ship almost our entire Arizona crop to Bakersfield directly from the gins here. Without our relationship with Knight Transportation, now the nation’s largest dry-van carrier, we couldn’t have accomplished that.
Arizona Agriculture: Do you have predictions when you see the supply chain smoothing out, if at all? And, why?
Bush: Quite frankly, I thought we’d have seen it by now. Unfortunately, the covid lockdowns that are still ongoing in China and other parts of the Pacific Rim have delayed things from getting back to normal. Also, with the upcoming holiday season right around the corner, demand for imports will still be at a premium which will put strains on capacity. Unfortunately, the only event that may return the logistics situation to a sense of normalcy may be an economic slowdown or, as many pundits are forecasting, a recession. If and when demand for freight starts to ease, we’ll start to see some balance again in the freight markets. The trick will be how these markets respond once economic engines start roaring again.
Arizona Agriculture: The cost and availability of fertilizer alone have been extremely challenging to our cotton farmers. The primary feedstock and process fuel for ammonia production is natural gas. The recent doubling of the Henry Hub natural gas price dramatically increased the cost of production, the building block of all nitrogen fertilizers. What does this impact have on Calcot as a marketing cooperative?
Bush: Farms operate essentially as factories. In a nutshell, you add labor and a bunch of inputs to produce a product. As long as you sell your product for more than what you put into producing it, you make a profit.
Where farms start to differ from this model, farmers plant the seed and grow the crop without knowing what price they will receive at the end, or whether they will make a profit or not. Last year, we saw cotton prices rise in tandem with input costs. Currently, I’m hearing that current input costs at average yields equate to about $1.00 per pound breakeven price for cotton growers in Arizona. Right now, with December cotton futures well over $1 per pound, that’s pretty good considering cotton farmers in Arizona also receive a good premium for their ginned seed, whether it be for cattle feed or purchased for saved seed by the major seed companies. At levels over $1 with current seed prices, most growers can generate a profit. The problem we have as a cotton marketing cooperative is the profitability of competing crops. In Arizona, that’s mostly alfalfa, which generates more profit than cotton and takes away from cotton-planted acreage.
Calcot now handles cotton grown in 7 states (CA/AZ/NM/TX/OK/KS/CO). In all these states, the main concern with our growers isn’t input costs, which seem to have stabilized, but the lack of water. As a cooperative, we’re very concerned about the impact the drought has and will continue to have on western, and now southwestern, agriculture. One of the reasons Calcot entered the Texas market was due to the fairly reliable production that Texas produced. It is a rare event in Texas where the whole state fails to make a crop. This year, we’re seeing 50% acreage abandonment in south Texas, a region that typically gets over 20 inches of rain a year. On the high plains, the abandonment number will exceed 60%. The state will set a record this year on abandoned acreage.
Even irrigated acreage is suffering in Texas, as growers typically rely on irrigation as a supplement to rainfall which has been negligent this year. And as far as Arizona goes, no need to mention our concerns here. Arizona Farm Bureau has devoted considerable resources and press to the water issues facing Arizona agriculture, and I’m confident that Arizona Farm Bureau will make sure agriculture has a front seat at the table on any issues pertaining to water and agriculture. It’s almost to the point where the only real solution seems to be to rely on the heavens above and pray for rain.
At least for the short term, water availability could see cotton acres stabilize or even increase in the Far West as cotton uses less water than forage crops, particularly alfalfa. In California, the implementation of the Sustainable Groundwater Management Act could force tree growers in several water districts to take out trees and switch back to row crops, of which Pima cotton will definitely be a consideration due to less water intake than corn or tomatoes. In the end, whether you’re an irrigated producer in the Far West or a dryland producer in Texas, you’re going to plant the crop that promises the best profit for your farm. Given the current supply and demand fundamentals for cotton, which support current prices, I believe it is a crop that will be in consideration to be planted for far Western growers at least for the next few years.
Arizona Agriculture: What message regarding these supply chain disruptions do you wish to convey to our Arizona cotton farmers?
Bush: Be patient and know that your marketer is doing everything possible to get your product sold and delivered. Our proximity to west coast ports gives us some advantage. Our main challenges are with ocean carriers who carry most of the Arizona cotton crop to its final destination. Eventually, the ship will right itself, pun intended.