Industrial Cluster: Observing The Global Cotton Planting Intention In The New Year From The Cotton Planting Cost

By considering the planting cost of American cotton in recent years, it is found that the planting cost of American cotton has risen significantly in the past two years. As far as the cotton planting income in 2024/25 is concerned, it has been near the break even point. The expected planting intention in 2025/26 will weaken, and corn and other crops will replace it.

At the same time, the output and export volume of Brazilian cotton have increased rapidly, surpassing that of American cotton in the past two years. At the same time, it has obvious cost advantages compared with American cotton. It is expected that Brazilian cotton will maintain a high yield pattern in 2025/26 when the weather is smooth.

Cost estimation of American cotton

It is estimated that the planting cost of American cotton will increase significantly after 2021/22. According to the corresponding unit yield estimation, the planting cost in 2023/24 and 2022/23 will both reach 83 cents/pound, while the planting cost before 2021/22 is mostly 50-75 cents/pound, with an average planting cost of 63.31 cents/pound.

The high planting costs in 2022/23 and 2023/24 are mainly caused by two reasons. The first is the high abandonment rate in these two years, resulting in low yield per unit area; The second is that the operating cost has increased by 26.67-42.5% in the past two years, which includes the obvious growth of seed, fertilizer, pesticide and interest expenses. The combination of the above two main reasons led to a significant increase in the planting cost of American cotton.

According to the planting situation in 2024/25, the abandoned farming rate has dropped, and the planting cost in this year is roughly estimated to fall back to 75-78 cents/pound, but according to the historical level, it is still in the high cost range.

Can the subsidy policy for American cotton planting cover the income of cotton farmers?

The current leading policies of cotton planting subsidies in the United States are marketing assistance loans and loan subsidy Payments, LDP) and accumulated income insurance plan (STAX).

Accumulative income insurance plan (STAX) refers to the establishment of an agricultural security system with extensive coverage and diversified risks through government subsidies, market-oriented operation and futures market linkage. Specifically, the government bears about 62% of the premium subsidy, and adjusts the subsidy proportion according to the insurance liability level (50% - 85%) selected by farmers. Its core lies in accurate pricing based on futures prices, and mobilizing multiple resources through policy leverage to achieve long-term stability of farmers' income. (Similar to China's futures+insurance model)

Since there are large individual differences under the STAX insurance plan, we will not discuss it too much here. We will focus more on the MAL and LDP policies with wider coverage and greater universality.

MAL and LDP are relatively mature support policies for the current cotton planting operation, and are sales support policies provided by the U.S. government for agricultural producers Corporation, CCC). Here, the focus of research will be on this policy.

For cotton, the application for CCC loan ends on May 31 every year, and the loan term is 9 months; A batch of cotton can only apply for a CCC loan once. The price of cotton redeemed by cotton farmers from CCC loans is loan The lower of rate and AWP.

First, observe the operation mechanism of MAL and LDP, so as to observe how American cotton farmers' mortgage willingness and planting willingness behave under the operation of the protection mechanism.

Loan Difference Payments (LDP): When AWP is lower than loan for a long time At the time of rate, cotton farmers often choose to give up redemption after the maturity of CCC loans, which will lead to a large backlog of CCC inventory. In order to solve this problem, the government has taken a disguised measure, that is, to implement loan differential subsidy (LDP): when AWP is lower than loan During rate, cotton farmers are encouraged to redeem and sell cotton to the market according to AWP price. The difference [LDP=loan rate AWP] is subsidized by the government.

Based on the above policies, the immediate cotton planting income of American cotton farmers under the LDP differential subsidy is simulated.

In terms of the absolute value of income, most of the income from cotton planting in the United States has been in a profitable state in the past 13 years. The best income year is 2021/22, which superimposes the double advantages of the peak spot price and the low planting cost.

For what factors affect the willingness of cotton farmers to participate in CCC mortgage loans, a further comparative study was conducted on the mortgage ratio of that year. The calculation shows that there is no absolute relationship between the mortgage ratio and the planting income of the year, but there is an obvious negative correlation with the planting cost (cor=-0.53) and a certain positive correlation with the output of the year (cor=0.29). Higher planting costs will reduce the willingness to mortgage, which may be due to the low mortgage price. It does not rule out that there are better financing channels in the market, leading to a lower willingness to participate in CCC mortgage loans. At the same time, if the annual output is higher, the proportion of participating in CCC mortgage will also rise.

In addition, LDP subsidies were generated in 2014/15, 2015/16 and 2019/20, but the mortgage ratio in these years was high, more than 50%, and even close to 60% in 2019/20, reaching the highest mortgage ratio in history. That is to say, the year with LDP subsidies will also stimulate cotton farmers to participate more actively in CCC loans.

Based on the above analysis, we can draw the following conclusions: First, under the AWP and LDP systems, it can not fully guarantee the positive income of cotton farmers, especially in the case of significant increase in planting in recent two years, the profit of cotton planting has dropped significantly to the level of break even. Second, the choice of CCC mortgage by American cotton farmers is more driven by bottom line thinking than by income.

That is to say, the AWP and LDP mechanisms currently in operation can play a certain role in supporting the absolute price of cotton, but cannot guarantee the absolute income. In the context that LDP subsidies have not been triggered yet, the planting intention in the new year will tend to consider the planting income.

Looking at American Cotton Planting Intention from the Perspective of Marketization

After sorting out the subsidy and protection mechanism for cotton planting in the United States, it was found that such a mechanism was more based on the bottom line thinking, and faced more severe market-oriented challenges against the background of significantly rising planting costs in the past two years. From the overall operating logic of the mechanism, we can also see that there is a clear difference between the targeted quantitative price subsidy mechanism of 18600 yuan/ton and 5 million tons in China. China is more inclined to maintain the quantity. After all, China's rigid demand is obvious, while more American cotton is exported, so it is understandable that it is more market-oriented.

Returning to the consideration of American cotton planting intention, since American cotton planting is a more market-oriented guiding ideology, the directly related factors are planting cost and planting income.

Here, we consider to use the abandoned farming rate as a portrayal of the annual planting intention. Although it also includes the consideration of weather factors, comprehensive consideration can still accurately reflect the annual planting intention to a certain extent. The results showed that the abandoned rate was negatively correlated with the cotton planting income of the current year (cor=-0.39), and the abandoned rate was significantly positively correlated with the cotton planting cost of the current year (cor=0.68). The above conclusions are in line with the common sense of marketization.

Let's briefly consider the price comparison between cotton, corn and soybeans. The price comparison of cotton and corn is more advantageous than that of soybean. Considering the higher coincidence of cotton and corn planting areas (both distributed in Texas), it is preliminarily expected that corn will replace cotton production area to some extent in 2025/26.

According to the latest survey data on cotton planting intention released by NCC, the planting area of upland cotton is expected to decline by 14.4% in 2025/26, and the planting area of Texas will be replaced by corn, wheat and other crops to a certain extent. This intention survey confirms the above research conclusions to a certain extent.

Since 2016, the output of Brazilian cotton has increased significantly year by year, and the output in 2023/24 and 2024/25 has surpassed that of the United States. From the perspective of global cotton supply, the absolute volume of Brazilian cotton exports has also surpassed that of American cotton in the past two years. Although there is still a gap between Brazilian cotton and American cotton in terms of consistency and quality, it has become an important challenger for American cotton in terms of output and export volume.

Calculate the cost of Brazilian cotton in recent five years. If only the depreciation cost is deducted, the average cost price in the past five years is 63.90 cents/pound, and the planting cost in 24/25 years is 63.38 cents/pound; If depreciation and opportunity cost are deducted, the average cost price in the past five years is 56.49 cents/pound, and the planting cost in 24/25 years is 55.62 cents/pound.

Comparing the cotton planting costs of Brazil and the United States in the past five years, it can be seen that the overall Brazilian cotton planting has more cost advantages. For the 24/25 year, American cotton is close to profit and loss, but Brazilian cotton still has profits. Therefore, from this perspective, for 25/26 years, the planting intention of Brazilian cotton is expected to be relatively stable and better than American cotton.

Finally, let's review Brazil's subsidy policy for cotton farmers. It mainly includes price support policy, subsidy credit policy, subsidy insurance and disaster compensation.

Price support policy: The Brazilian government protects the interests of cotton farmers through price support policy. When the market price of cotton is lower than the minimum protective price recognized by the government, or when cotton farmers have difficulty selling, the government will pay price differential subsidies.

Subsidy credit policy: 1. Production loan: used to purchase planting raw materials. The loan period is about 9 months, and it needs to be repaid when the crops are sold. Cotton farmers have relatively low dependence on such loans. 2. Sales loan: the loan amount is the crop yield multiplied by the minimum pre-sale price, and the loan term is generally about 180 days. 3. Investment loans: mainly provided by the National Development Bank for medium and large manufacturers to purchase agricultural equipment.

Subsidy insurance and disaster compensation: Since 2005, Brazil has introduced subsidy insurance programs and disaster compensation policies to deal with the impact of force majeure such as natural disasters on cotton planting.

On the whole, the breadth and intensity of cotton planting subsidies in Brazil are relatively low compared with those in other countries. The government takes more measures to promote the research and development of planting technology to improve production efficiency, reduce some taxes to reduce planting costs, and improve agricultural infrastructure to promote the sustainable development of the domestic cotton industry. Therefore, Brazil's cotton planting intention is more market-oriented.

By considering the planting cost of American cotton in recent years, it is found that the planting cost of American cotton has risen significantly in the past two years. The subsidy policy based on the operation of the American MAL and LDP mechanism is more of a backstop, which cannot guarantee the absolute income of cotton farmers. As far as the cotton planting income in 2024/25 is concerned, it has been near the break even point, and the expected planting intention in 2025/26 is weakened The substitution of corn and other crops appears.

At the same time, the output and export volume of Brazilian cotton have increased rapidly, surpassing that of American cotton in the past two years. At the same time, it has obvious cost advantages compared with American cotton. It is expected that Brazilian cotton will maintain a high yield pattern in 2025/26 when the weather is smooth.