Cotton: California dairy plunge may keep some acreage in cotton

How much will California cotton acreage fall in 2009?

Maybe not as much as expected. The reason: falling milk prices will decrease demand for corn silage, alfalfa hay and other raw materials needed by dairy producers. That means that at least some of the acreage expected to come out of cotton may, in fact, stay in the crop in 2009.

According to the National Cotton Council's planting-intention survey results, California upland cotton acreage might decline as much as 55% in 2009, plus the state could see some loss in extra long staple (ELS) cotton. If upland acreage fell that much in the Golden State, it would be the largest estimated decrease in non-ELS acreage in the U.S. this season among the major cotton producing states.

But as NCC pointed out in its press release, growers are still trying to figure out where other crop prices are heading as they determine how much cotton to finally plant. Plus, the survey was conducted in December before milk prices plummeted. Lower milk prices in California are further compounded by high production costs and surplus production capacity.

As dairy farmers ran short of cash, farmers who grow silage and hay for the dairy industry began to feel the pain, as well.

"Some farmers who grow silage for dairy producers still haven't been paid for a lot of last year's tonnage and may not be," said one of our contacts in the San Joaquin Valley (SJV). "We're hearing about bankruptcies and, worse yet, several cases where dairymen have committed suicide."

Another of our SJV contacts said dairymen have been trying to negotiate lower prices for silage, hoping to chop that cost by 40% to 50%. That send rowcrop producers looking for alternatives, and cotton keeps coming up on the list.

"We're still looking at a decline in acreage, but loss of dairy production may result in some land going back to cotton that might have otherwise been planted in corn or alfalfa," he added. "Farmers figure that at least they'll get paid for what they grow."

One crop consultant said this week that a farmer who dropped out of cotton completely two years ago expects to plant at least 200 acres this year. His growers figure that "the government program for cotton is more certain than anything else." He expects at least some land to come out of grain and silage and go into cotton. "This will be a minor shift, I think," he added.

While upland cotton will take the biggest hit in California, high prices for ELS Pima cotton have caught the attention of growers. Coupled with disinterest in dairy crops, that might help maintain more acreage. "I'm hearing Pima prices at $1.40 a pound, with predictions that it will go to $1.50," another consultant said. "Some farmers say they can't make Pima pay for less than $1.50, but we've got farmers who pretty regularly make 3 bale/acre Pima averages in good years, and they can make money at even lower prices. If a grower has water to grow cotton, that's where he'll put at least some of his acreage."

California, the nation's leading milk producer, has high production costs, even without last year's sharp run up in fertilizer and fuel expenses. SJV land has been at a premium for at least the last decade. Cities expanded, taking up prime farmland, and dairymen sold out operations closer to the Pacific Coast and relocated to the SJV. Land for dairy development in some instances sold for $15,000 or more an acre. Tax incentives further spurred dairy expansion.

Plus, California has its own milk subsidy program, which has encouraged more and bigger dairy herds. But the rug was abruptly pulled out from under dairy farmers this month when the state cut its fluid-milk subsidy by more than a third from about $1.50 a gallon to around 97 cents a gallon. That led to the lowest farm-gate price for milk in 30 years, said Steve Lyle, the California Department of Agriculture's public affairs director. Some dairies milking 1,000 cows could be losing $3,000 or more a day, according to one estimate. Years of equity are rapidly melting away as producers try to hold on until prices rebound.

California sets milk prices based on dairy futures trades on the Chicago Mercantile Exchange. With the recession, "world and domestic demand for dairy products have declined dramatically," he said. At the same time, inventories of milk and other dairy products have been on the rise. In mid 2008 the state's dairy industry made a big push to increase dry milk production to meet expected export demand, which has since evaporated.

One of our contacts in the SJV said that, ironically, some of that dairy surplus - in the form of cheese, dry milk and other foods - was being stored in a cotton warehouse.

Water, though, will be a limiting factor for cotton in parts of the SJV, especially on the west side of the valley where one major water district expects to have little or no water this year, based on current projections. Water in strapped districts will likely go to permanent crops.

-- Owen Taylor