What a difference two years makes.
This year, farmers are starting at prices in the 65- to 70-cent range, while supply is expected to exceed demand for the second year in a row. Economists point to this as a classic example of the "rule of high prices."
Economist Mark Welch with Texas AgriLife Extension said that cotton demand dropped during the worst of the recession, but other factors helped push prices higher. Part of the surge was due to floods that decimated cotton crops in India and China, two of the world's top producers. India has recovered sufficiently to produce an all-time record crop, while the market is seeing the effect of those high prices.
"That's the rule of high prices," Welch said. "High prices drive producers to produce more and consumers to buy less."
During the financial crisis of 2008, cotton prices were as low as 40 cents a pound, and the world's warehouses held more than a year's supply before supplies dwindled and prices skyrocketed. A lot of Texas farmers missed out on the 210 bonanza, but planted more cotton than ever before last year to take advantage of high prices. From 5.5 million acres in 2010, Texas farmers planted 7.55 million acres a year ago. Gaylon Morgan, state cotton specialist, said only about 3.1 million of those acres were harvested.
"Prices were still good, but that doesn't help when you don't have anything to sell," he said.
Morgan said most of the 5.35 million acres of cotton in the state this year is in good to fair condition, but nearly all of it needs some rain. Only 2 percent of the cotton in June was rated as poor or very poor, he said. Planting moisture was better than last year and he described the rains as "spoon feeding" the crop. The Rolling Plains and the area north of Abilene to Lubbock were still in exceptional drought as of June.
"There is so much that goes into determining cotton prices that is out of our control," Welch said. "What happens with the financial crisis in Europe, and conditions in other cotton producing countries, goes into it. I really believe that if the price were strictly supply and demand driven that we would be looking at 30 cent cotton. Instead, we're looking at 60 cent cotton. That's the world we live in today."
Carl G. Anderson, a professor emeritus at Texas A&M University, titled his latest newsletter "Too Much Cotton, Too Little Demand." He described the market in June as suffering from "abundant supply, sluggish demand and weak prices."
"The projected prices by USDA for the 2012/13 season, received by producers, was lowered by 5 cents from the month before to 60-80 cents," he wrote. "The 20-cent range indicates great price uncertainty because of potential shifts in crop size and weak demand."
Anderson expects prices to be erratic this year because of economic conditions and the strength of the dollar.
"Price can change direction without notice," he wrote. "Be careful in using futures contracts that expose you to excessive margin calls. When feasible, use options that do require a premium but are not subject to margin calls."
Come high prices or low this year, one thing hasn't changed during the roller coaster that cotton has been on the last few years. If this summer turns out to be a repeat of last year in terms of weather, price won't matter very much because there will be very little crop.
"Prices are dropping, but they might go back up again," Morgan said. "It's really hard for farmers to really know what's going to happen with prices as we go on. One thing we do know is that a good rain would do the crop a world of good. That hasn't changed."