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$3.50 futures attracting more attention to corn in cotton country

What a difference a year can make. Last winter, when the organizers of the Delta Ag Expo in Cleveland, Miss., announced the beginning of its session on corn production, three-fourths of the audience got up and walked out.

Next month, when Mississippi Extension Corn Specialist Erick Larson begins the same session, he may be speaking to a standing-room-only crowd. The difference: Sharply higher corn prices brought on by rising demand for ethanol is creating more interest in planting corn.

“The marketplace is saying, ‘I need corn, and I’m going to get it,’” says Anthony Tancredi, vice president with Allenberg Cotton Co., referring to the price movement in corn futures since September.

Tancredi’s company is the second or third largest cotton merchandising company in the world, depending on who’s counting, but Tancredi found himself focusing as much on the grain market as on the white fiber in a presentation at a “key grower” meeting sponsored by Monsanto Co. in Memphis, Tenn.

Corn planting has become a hot topic in the Mid-South since September as farmers watched corn futures climb from $2.20 to $3.60 per bushel. In early December, cash corn prices were about $1.60 a bushel higher than last year’s season average price of $2.00.

“Almost every call I get these days is about corn seed,” says Hugh Beckham, a Monsanto sales representative who works in the north Mississippi Delta and a participant in the meeting in Memphis.

Tancredi said this fall’s price run-up in grain prices actually began last summer when a shortfall in winter wheat production due to the drought conditions on the High Plains caught traders off guard.

Wheat prices rose from $3.40 per bushel in early June to nearly $5.60 per bushel in November before dropping back to $4.65 in early December.

Traders in corn futures began to notice the rally in wheat futures at about the same time analysts were predicting ethanol manufacturers could need another 500 million bushels of corn in the next year.

“Participants in the market started asking where are we going to get all this corn for ethanol, and the corn market started going crazy,” he said. “Then the soybean guys began saying, ‘I’m not letting corn take all of my market,” and soybean prices began to follow corn.”

Cotton futures, on the other hand, have remained relatively flat despite early predictions that reduced plantings and dry conditions in Texas would result in a much smaller cotton crop in 2006.

“We had a drought across much of the Cotton Belt in 2006,” said Tancredi. “But we produced way more cotton than we expected. In its latest report, USDA estimates the national average yield for cotton at 798 pounds, which would be the third highest on record.”

In that December crop production report, USDA left 2006 upland and pima cotton production unchanged from the November report at 21.3 million bales, which would be down 11 percent from last year’s record of 23.3 million bales.

Even with the smaller U.S. crop, the world is not likely to encounter any shortages of cotton in the 2006-07 marketing year. USDA’s latest supply and use numbers have world-ending stocks for 2006-07 at 51.49 million bales or 47 percent of total world consumption.

“For prices to go up, available stocks have to be less than the world needs,” says Tancredi. “And that is not the case now.” (The last time world cotton prices were above 80 cents per pound, the world stocks-to-use ratio was 37 percent.)

World cotton use has grown from 108.8 million bales in 2004-05 to 115.82 million bales in 2005-06 to an estimated 121 million bales in 2006-07, according to USDA. After hitting a record 120 million bales in 2004-05, world production has fallen back to trend line numbers at 114 million bales in 2005-06 and a projected 115.86 million in 2006-07.

“Growth in demand continues,” says Tancredi. “But we just have too much cotton for now. Despite the drought, U.S. cotton yields were close to 800 pounds per acre. The U.S. cotton balance sheet is prone to surplus, which keeps prices near the CCC loan rate.”

U.S. growers are also expected to have harvested one of the larger corn crops on record in 2006 (10.75 billion bushels), but the rising demand for ethanol is expected to give corn producers a far better outlook.

“The demand for ethanol is expected to be up 500 million bushels next year,” said Tancredi. “If demand continues to build as expected, then millions more acres of corn will be required above the 80 million or so acres that farmers have been planting in recent years.”

Corn-based ethanol production in the United States doubled between 2001 and 2005 and could double again in the next few years. Currently, 100 ethanol plants capable of producing 5 billion gallons of ethanol annually are operating in the United States. Another 58 plans that are either under construction or expanding could increase the capacity to 8 billion gallons.

Tancredi says he has little doubt cotton farmers will increase their corn acreage in 2007. “If the corn market does its job, it will get cotton out of production. So some drawdown of stocks is to be expected. But it won’t be enough to change the fundamentals; not in 2007 anyway.”

If cotton acres are shifted to corn not only in the United States but also in other parts of the world in 2007, 2008 could be a different story than 2007 for the cotton market.

Unless something happens to cut off the demand for ethanol, something will have to give,” says Tancredi. “Eventually grains will put enough land out of cotton to bring cotton prices up.”


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