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Large cotton stocks a drag on prices

A projected decline in U.S. cotton acreage this season is probably a good thing, given weakening demand from China, rising global and U.S. cotton stocks and high grain prices, say cotton market analysts speaking at the Ag Market Network’s April 4 conference call, in Lubbock, Texas.

Carl Anderson, professor, Extension specialist emeritus, Texas A&M, said USDA’s March 31 Prospective Plantings report indicating less cotton and corn and more soybeans in the United States “makes economic sense. We have a surplus of cotton on hand. So we can cut back our acreage at a time when prices are good for alternative crops.”

Anderson said the Delta states “have cut acreage by half in over two years, which is helping us get in line with what production should be. Acres also dropped sharply in the Southeast, where only Georgia plans to increase cotton acres.”

California cotton acreage is forecast down by 100,000 acres this year, with much going to alternative crops. “Just a few years ago, California was planting 200,000 acres of upland cotton.”

In the Southwest, Texas cotton acreage has dropped by 25 percent over two years, noted Anderson. “This year intentions indicate we’ll plant about 200,000 acres less than the 4.9 million planted in 2008.”

That puts total U.S. acreage at 9.4 million, compared to 15 million just two years ago. While the acreage cutbacks are substantial, good yields have been making up for a lot of that loss, Anderson says.

This factor could play out again in 2008, or not, says Anderson. “With over half of the U.S acreage now in Texas, and over half of that in dryland production, the production of cotton in the United States is a little bit more uncertain and more volatile than we’ve seen in the past. Remember in 2006, we lost 2 million planted acres in Texas.”

Anderson pegs U.S. production at close to 15 million bales given average yields, “but if we come in with below average yields on our dryland crop in Texas, we could see the nation’s cotton crop drop to 13 million to 14 million bales.”

O.A. Cleveland, professor emeritus, Mississippi State University, says the potential for a U.S. carryover of 10 million to 10.4 million bales “has to be extremely bearish. At the same time, six or seven months ago, we were expecting world carryover stocks of 50 million to 53 million bales, and now it appears that world carryover on Aug. 1 is going to be at 60 million bales or slightly higher, if our international textile activity is slower than expected. And there’s some indication that it is.”

Cleveland believes U.S. cotton production will fall somewhere around 14 million to 14.5 million bales “because of the quantity of acres in Texas and the difficult moisture situation this year relative to last year.”

Cleveland says the cotton market needs lower prices “to build back up some demand. New York futures need to come more in line. Volatility will still remain the key in this market.”

The markets were under pressure in early April, noted Mike Stevens, Swiss Financial Services. “There was an article in Barron’s magazine about the possibility of a burst in the commodity bubble that rattled a lot of traders. Plus it was the end of the month and we had end-of-the-month liquidation by some of the funds. May cotton, our lead month, posted a low of 67.31 cents. But we have not been back down there since.”

Since then, “the market moved up into a remarkably dull range considering the limit ups and downs we went through in March. The volatility is starting to slow down, at least for now. I’m not sure how much fundamentals mean to the market, but there is no question that USDA will raise U.S. ending stocks, if for no other reason than ginning figures which show an additional 372,000 bales of production.

“There is also a good chance that exports will be cut again. There is nothing wrong with sales, but shipments are running about 100,000 bales a week less than what they need to average to make the current annual export projection. With 18 weeks left in this marketing year, we need to average about 100,000 bales shipped per week to reach the projection.

“Right now (April 4), we seem to have some market stability, and we’re all waiting for the other shoe to drop with the funds. We know they’re still there and still interested. You can’t go to sleep on this market.”

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