Surging corn prices, potential problems with moving old crop cotton and estimated ending stocks for old crop creeping over 7 million bales are setting the tone for a decrease in cotton acres in the United States in 2007.
Carl Anderson, professor, Extension specialist emeritus, Texas A&M University, speaking at the Ag Market Network’s January teleconference, expects big reductions in Louisiana, Mississippi and Arkansas cotton acreage in 2007, perhaps as much as 20 to 25 percent in each state, as producers shift acres to grains.
There are good reasons for this, noted Pat McClatchy, executive director of the Ag Market Network. “During a three and a half day period in January, March corn ran up 62 cents, while December corn moved up 44 cents. The corn effect is something we’re going to have to be aware of.”
While the reductions in cotton acreage could be dramatic, Anderson noted that fundamentally it’s needed. “Farmers can grow grain easily, and we really need a cutback in our cotton acreage to get our carryover away from that 7 million-bale mark to around 4 million or less.”
Anderson said several old crop developments are weighing heavily on prices.
USDA’s Jan. 16 assessment that old crop cotton production is 400,000 bales higher than it reported in December, demonstrates “how new varieties and technologies are very strong, and I credit the boll weevil eradication program for helping growers make a top crop, which explains what is happening in Texas.”
However, the resulting increase in carryover, “is a pretty big load. Worldwide stocks also inched up, which doesn’t help the market from a fundamental standpoint. We have just a little more cotton than we had a month ago.”
The large carryover “clearly hurts the fundamental argument that cotton must buy acres,” said Mike Stevens, Swiss Financial Services, Mandeville, La.
Anderson noted that with over 11 million bales of cotton now in the loan, bigger problems could surface down the road. “With the relationship of the A-Index to nearby futures and the adjusted world price, there’s not much wiggle room for buyers. We’re in a situation where we could make a lot of cotton available mid-year,” Anderson said.
That turns the focus to the export market, which also has been disappointing as of late. For the last three months, trade has slowed significantly for the world’s leading cotton importer, China.
“Three things can be happening,” Anderson says. “China has more cotton than we have estimated; they’re using more manmade fibers; or they will need to import a substantial amount of cotton the first half of this year.”
Giving credence to the former factors, “USDA did decrease China’s imports (for 2006-07) by a million bales from 17 million bales to 16 million bales.”
“As the market begins to shift and starts looking at the upcoming crop, whether total U.S. acreage is down 2 million or 3 million acres, the market will see less cotton available and there should be some market support. We also think that foreign countries will trim their acreages by 2 percent.
“With a smaller crop and rising consumption, world carryover will drop 4 million or 5 million bales this season, and that is sufficient to bring the A-Index to the high 60s or the low 70s. We’ll trail below that in futures by 10 cents, and your price at the farm level is another 6 cents below that.”
Anderson projects a 55-cent average price received for new crop cotton, which would cut the counter-cyclical payment by about 3 cents. “Meanwhile, prices for the 2006-07 crop are coming in well below 50 cents with the maximum counter-cyclical payment.”
Anderson stressed the importance of developing a marketing plan for the coming crop. “We’re in trouble this year because we could dump a lot of cotton out of the loan mid-year and depress us from where we are now.
“Producers need to watch both sides and not get too vulnerable up or down,” Anderson said. “This market can make a 5-cent or more move technically, and that is going to be the time, down or up, to fix in some of the options prices. People who are devising marketing plans need to know how to handle that. I’m not sure the loan is a very good marketing plan down the road.”
Technically, by springtime, December cotton should be trading somewhere between 62 cents and 65 cents, Stevens said. “But that’s not the time to start getting bullish. That’s the time to start putting some floors under the market.”
Anderson and Stevens are both concerned about stiff trade competition from India. “USDA cutting Chinese imports is telling everyone that China will use its own cotton before it starts using imported cotton. And Indian cotton, which is right next door, is really competitive and China has its eye on that market, too,” Anderson said.
As residual supplier, “this really leaves us in a vulnerable situation,” Anderson said.
“While India’s consumption is growing, so is its production. In fact, India’s production is outpacing its increase in consumption. It is geared up to store cotton from year to year, so whatever the world price is, its negotiators will get down there low enough to make it an attractive buy. That’s a tough situation for us to be in here in America, and I’m deeply concerned about it.”