Project Summaries

11-800TX  Project Manager: J. M. Reeves

THE COST AND FLOW PATTERN IMPACTS OF ALTERNATIVE COTTON FUTURES DELIVERY POINTS IN TEXAS

John R.C. Robinson, Texas A&M University

The overall objective of this research is to evaluate alternative cotton flow and delivery points on local prices, in addition to flows and aggregate costs. Specifically, there will be an analysis of the cost, flow and pricing impacts of alternative U.S. cotton futures delivery point combinations with a focus on alternative Texas delivery points, including various combinations of Dallas/Fort Worth (DFW), Galveston, Houston, and Lubbock. The results will allow judgments as to how any particular combination of delivery points affects the aggregate shipping/handling costs (and thus competitiveness) of the U.S. cotton industry.

Texas is the number one cotton producing state in the U.S. and the U.S. is third largest producer in the world. In recent years, the U.S. has produced about 20% of world supply. Around 80% is exported and the remainder is consumed in the U.S. The international markets are located throughout the world, but primarily Asia. Thus, a significant majority of both U.S. and Texas production is dependent on foreign markets that can only be accessed with long-haul transportation services. The proximity of foreign suppliers (India) to the Far East is a threat to the competitiveness of U.S. cotton. Shipping and handling efficiency is a critical area of research for the U.S. cotton industry.

The analysis applied a spatial, intertemporal equilibrium model of the international cotton industry that includes substantial detail on domestic and international transportation. The effects of the increasing warehouse capacity at the DFW delivery point location was determined by adjusting DFW warehouse capacity over a range of levels, reflecting the gradual expected increase over time. The model results were consistent in that as new capacity is added at DFW, the resulting economic solution is for more U.S. supply to be allocated through DFW at the expense of other U.S. warehouses. On average, small amounts of supply are being reduced from all other U.S. warehouses. For example, for all other Texas and Oklahoma warehouses, each 100,000 bale increase in DFW capacity results in roughly a half percent decrease in supply at these other warehouses. For most of U.S. warehouses outside Texas, there is a quarter percent decrease in supply for every 100,000 bale increase in Texas supply. As the capacity of DFW increases, U.S. exports actually increase in response to a more competitive supply path. This results in a very slight decrease in U.S. cotton prices, ca. 38 cents per bale for every 100,000 bale increase in DFW capacity.

The effect of greater cost efficiency implies that U.S. exports are more competitive, and hence more is exported and the aggregate export value increases. As warehouse capacity expands in DFW, the aggregate cost of exporting U.S. cotton should decrease, and U.S. cotton should be more competitive. As of December 2013, New Orleans will be eliminated as a delivery point for U.S. cotton and Dallas will be added.

 

Project Year: 2012
 

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