Fine Print - March 2011

Bolls, bales and Bismarck
By G.D. Gearino

Let’s have some fun and put a financial twist on the game Six Degrees of Kevin Bacon, in which you seek to trace the connections between Point A and Point B in the fewest number of steps. In the original game, you count the links between the actor and any other randomly selected person. In our version, we’ll trace the steps between North Carolina’s cotton farmers and Otto von Bismarck, who in the 19th century not only created the modern German state but also somehow managed to get a city in North Dakota named after him. Ready? OK, let’s go.

The state’s cotton industry, of course, is nothing like it used to be. In many ways, that’s a good thing, considering that in the antebellum period it depended on slave labor and in the postbellum era on sharecroppers — of whom there were more every year, growing more cotton, selling it for less and becoming collectively poorer all along. Today, the state’s cotton farmers are growing less and selling it for more, a circumstance only loosely explained by supply and demand. I’ll trace that fact to Germany’s Iron Chancellor in just a couple of steps here, but first I have to brag: I can claim just three degrees of separation from Kevin Bacon. He once starred in a movie with Elizabeth Perkins (there’s one), who appears in the TV show Weeds, in which Matthew Modine once guest-starred (there’s two). And Modine starred in a movie based upon one of my books. It was filmed in Wilmington; he and I had lunch together one day — which gives me a Bacon score of three. But if you’re not impressed, you’re in good company. This fact has never so much as gotten me a free drink in a bar.

Back to cotton: A little over a month ago, farmers from across Eastern North Carolina gathered in Kinston for their annual meeting to catch up on the state of the global cotton market. They learned some encouraging news from a fellow named John Flanagan, a North Carolina-based cotton trader and market analyst. He believes the price of cotton, which climbed above $1 per pound last year, could go as high as $1.75 this year. He cited a number of reasons for this, upon which he elaborated when I caught up to him later.

One is that our cotton-growing homeboys are the beneficiaries of other people’s weather problems. Flooding in Pakistan last year destroyed millions of bales of cotton, while Australia — another major cotton producer — had its own catastrophic weather event earlier this year. Not to be cold-blooded, but what’s bad for them is good for us, obviously. A second reason is found in what Flanagan calls the “food or fiber” choice that developing countries typically face: Do they use their agricultural land to grow food or cotton? China and India are the world’s two largest cotton producers, but they’re also the two largest developing nations. Even though global demand for cotton is surging, they’re not turning over any more land to fiber production. They’ve got way too many mouths to feed. Again, that’s good for us in North Carolina. We’ve got a barbecue joint or a McDonald’s on every corner and feel no such pressure. When the price of cotton goes up, our farmers can simply stop growing corn or soybeans or whatever and cash in with cotton. Flanagan expects the number of acres devoted to cotton in the state this year will be 50% higher than in 2009.

But it’s a big world with lots of land, and he understands that markets, like nature, abhor a vacuum. Central and South America could become bigger cotton-production players, but Flanagan says the greatest untapped potential is in Africa. And this is where we return to Otto von Bismarck.

In most ways, Bismarck was very much a man of his times — which is to say, a ruthless, scheming Prussian who saw Europe as one large chessboard to be manipulated to his will. But in one regard he was uniquely modern and wise. Bismarck understood that Germany needed to be socially stable before it could be transformed from a loose collection of states into an industrial world power. It needed a working class that shared in the prosperity, not one that was restive and oppressed. Accordingly, Bismarck pushed laws that limited child labor, established maximum work hours and provided health and old-age insurance. The benefit to all that was a big leap into industrialization and prosperity. Of course, within the next half-century Germany also managed to start two world wars, so let’s call it a mixed bag of consequences. But the point is undeniable: Prosperity springs from stability, not strife.

Africa’s problem is that it has no Bismarck. Many, if not most, of its countries are social and political messes. “Who’s going to invest in cotton production there?” Flanagan asks. It’s a rhetorical question, of course, albeit one with an obvious answer (which Flanagan himself supplies): Somebody will, eventually, because “capitalism seeks out such inefficiencies, then destroys them,” he says. But until that day arrives, and as long as the developing world has to choose between food and fiber, North Carolina’s cotton growers will likely enjoy a nice run of prosperity. In terms of money, cotton will never replace tobacco — what could? — but it’s proof that there’s always a dividend to stability. And I’m not just whistlin’ “Dixie” here.