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Cotton prices should rise with falling stocks

USDA’s Economic Research Service has increased its estimate of U.S. cotton exports for the 2008-09 marketing year from 14.5 million to 15 million bales due to an expected decline in world cotton production.

Some analysts think that 15-million-bale export estimate may be a tall order, but even if U.S. August 2008-July 2009 shipments don’t reach that amount, the figure is one indicator the economic outlook for U.S. cotton could finally be improving.

“That 15-million-bale export forecast gives us some cause for hope,” says Gary Adams, vice president for policy and economic services with the National Cotton Council. “Even if we don’t get to 15 million in exports, it leaves us in the situation where we may see a tightening of the balance sheet for U.S. cotton.”

Adams, a speaker at the American Cotton Producers/Cotton Foundation summer conference, was referring to the Economic Research Service’s forecast that 2008-09 ending stocks could drop to 4.6 million bales or less than half of the 10.2 million bales forecast for the end of 2007-08 (on July 31).

“Any number between 5.2 million and 7.1 million bales is still better than 10 million bales,” said Adams. (He said some analysts believe the 10.2 million bales USDA is using for 2007-08 ending stocks is too low and the export figure of 15 million bales is too high. The range in the numbers could put final 2008-09 ending stocks at 5.2 million to 7.1 million bales.)

USDA economists say world cotton production could drop from 2007-08’s 119.3 million to 112.2 million bales in 2008-09 because of a decline in planted area, which has fallen to the second lowest level in 15 years. Most of the decrease is occurring in the United States.

“The decline in world cotton production in 2008-09 is attributable mainly to the lower forecast for the United States, as this crop is projected 28 percent below 2007-08,” said USDA economists Leslie Meyer, Stephen MacDonald, Robert Skinner and James Kiawu, writing in the latest ERS Cotton and Wool Outlook.

“China’s crop is forecast only slightly below that of a year ago, while the rest of the world of the world is forecast to fall 2 percent to the lowest since 2003-04,” they said. “The U.S. share of global production is estimated lower at 12 percent in 2008-09, compared with the five-year average of 18.5 percent.”

Although the decline in ending stocks could be a positive sign, Adams isn’t convinced U.S. cotton plantings will rebound in 2009.

“Input costs for cotton are still high relative to other crops,” he said, noting that potash and phosphate prices have risen more than 400 percent since January 2004 while fuel and nitrogen costs had gone up 200 percent before diesel prices began leveling off a few weeks ago.

The prices farmers receive, meanwhile have been declining since peaking in early March in what some experts are now calling a “mystery spike.” The day after Adams spoke in Savannah, Ga., (Aug. 14) December 2008 cotton futures fell another 240 points to 67 cents per pound.

“We are seeing some weakness in competing crops, however,” said Adams. December 2009 corn futures declined to $5.50 per bushel on Aug. 15 while November 2009 soybeans had dipped below $12.50 per bushel in electronic trading on Aug. 17.

“The concern now is that when you look at these prices we could still be in a situation where we are still trying to hold on to cotton acres. At best, we may be holding on, but we could possibly lose more acres in 2009.”

Another concern is that the performance of the U.S. and world economies and higher energy costs could also slow demand for textile products. “It may well be that consumers have to curtail clothing purchases because of higher gasoline prices.”

USDA’s latest crop production forecast has U.S. farmers harvesting a crop of 13.77 million bales in 2008, or about 5.5 million bales less than in 2007. Some believe the crop could still reach 14 million to 14.5 million bales.

“If you look at the August crop report over the last five years, the crop gets bigger by from 1 million to 3 million bales between August and December,” said Adams. “That could be another reason for higher stocks figures.”

Adams acknowledged that other cotton-growing countries seem to be making much smaller adjustments in their cotton acreages. The exception may be India, which has increased its yield and production dramatically in the last few years.

Lack of rainfall and the higher prices being offered for grain could lead Indian farmers to switch acres out of cotton. (Press reports out of India in recent days have been predicting a “drastic” fall in Indian cotton production in the 2008-09 marketing year.)

“Cotton still appears to be the better alternative because of the sharp increase in India’s cotton yields,” said Adams. “The key to the world production and price outlooks may be whether a shift will occur in Brazil. Brazilian farmers are expected to plant more soybeans because of exchange problems and the higher prices offered for soybeans.”

Whether the rebound occurs in 2009 or later, more analysts are predicting the long-term outlook for cotton is becoming more promising.

“This ailing patient,” the U.S. cotton sector, shows every sign of recovery — it just may need at least another year to recuperate,” says Michael Whitehead, vice president for food and agribusiness research at Rabobank. “While the long-term outlook for the cotton sector in the United States is favorable, the sector may still endure some pain.”

Whitehead believes the U.S. cotton sector is likely to improve as major global cotton producers such as China and India increasingly divert more acreage into food production to keep pace with rising incomes and populations. “This would likely raise the price of cotton and entice U.S. farmers to increase their cotton acreage.”


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