U.S. cotton acres could decline for a second year in a row, if current grain and soybean prices hold steady, and if the domestic cotton crop keeps getting bigger, an analyst says.
U.S. cotton producers planted 10.85 million acres to cotton in 2007 and are expected to produce a surprisingly large crop of 18.1 million bales this harvest season — led by Texas producers. In its Oct. 12 crop production report, USDA increased Texas output for this season to 7.5 million bales, 1.4 million bales higher than August estimates.
“We had a late start, but we have had very favorable weather since mid-September,” said Carl Anderson, Texas A&M Extension specialist emeritus, during the Ag Market Network's Oct. 16 teleconference. “We have about 88 percent of our cotton open, so we feel like the 7.5 million bales is in the ballpark, and it could get higher. The yields we're getting from these new varieties are unbelievable for both dryland and irrigated cotton.”
Texas yields are expected to average a record 766 pounds per acre, a 90-pound increase over 2006.
Yields aren't too shabby in the rest of the United States either. USDA projects an average nationwide yield of 826 pounds, the third highest in history.
The unexpected production and about 9.5 million bales of carryover from the 2006 crop create a more than adequate supply of cotton for the time being, according to Anderson.
The good news is that the world crop is smaller than last year's, despite some major adjustments made to Chinese carryover and crop size.
USDA recently pegged the 2007 Chinese crop at around 35 million bales, 3 million bales higher than last month's estimate. “But they may use 55 million bales, so they still have a sizable gap of 18 million to 19 million bales of cotton based on those numbers,” Anderson said.
The gap “does keep the export market open, but our domestic use is running only about 4.6 million bales per year. So we have a tremendous supply of cotton available in the short run that puts December 2007 futures trading 62 cents on the low side.
“I wouldn't be surprised if there were days when the market dipped below that. We also don't see prices jumping to the mid-60s or higher.”
Anderson says prices are in line with the current world stocks-to-use ratio of 42 percent.
“But the market has not made an adjustment for the next crop. That is a big question mark, particularly in the United States, with producers interested in switching acres due to high prices for grain and soybeans.
“We're not sure what grain prices are going to do at the first of the year, and we're not sure what the cotton price is going to do either.
“But if we stand now on price relationships that we have, I expect a 10 percent reduction in acres to around 10 million acres and a crop of around 16 million bales.”
Anderson also notes that if the cotton price does not improve enough to buy additional acres of cotton, “acreage could easily drop below 10 million acres, to 9.5 million or even 9 million acres if the situation gets extreme.”
Earlier in the summer, Anderson believed December 2008 futures would have to climb to 80 cents to buy acreage, “and that could still happen, but right now, I'm looking at cotton trading in a range of 75-79 cents.”
That's going to make marketing of new crop cotton interesting, according to Anderson.
“We have the background for a very uncertain market, one that can swing by several cents in just a few days, particularly after January.”
Mike Stevens, an analyst with Swiss Financial Services, noted that despite the growing U.S. crop, USDA raised U.S. ending stocks only 200,000 bales, “which says that USDA still believes that we are going to get our share of the world export market.”
Stevens says the market “has run off and left the mills behind, who continue to watch the fundamentals and have been bearish all along. They are buying on dips below 63 cents.
“The most glaring, most bearish fundamental is the lack of export offtake. The last few weeks, we've seen demand shrink to almost nothing. The demand from the Chinese mills is strict-middling, inch and an eighth. There seems to be a shortage of this kind of cotton. That's kept the Chinese market firm.”
Stevens said there are some quality concerns in China's domestic crop due to untimely rains. “Apparently, there is some high micronaire cotton, of 5.0 and above, showing up in the early picking. But the Chinese merchants are not giving anything away.”
Stevens advises producers to place a 72-cent floor underneath the December 2008 contract, on rallies. “For producers needing to own calls, depending on what you did on your cash cotton, give spot December a chance to pull back below 62 cents, then buy March calls. There's just not enough time left on the December.”
Longer range, Anderson sees cotton in the 72-78 cent range. “We hope we see something above 78 cents, but it's looking like we may not need that to get enough cotton for the coming year.
“But at the end of 2008, we're going to be short of cotton, and if the world numbers are where they are now, it's going to be hard to not see the market break 80 cents.”