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Positive pricing opportunities exist for grains, cotton in 2008

Southwest farmers have promising pricing options for grains and cotton as they plan for 2008 acreage.

Grain farmers benefit somewhat from the double-edged sword of crude oil market fluctuations, says Jose Pena, Texas A&M Extension economist (management), Uvalde.

As crude prices increase, demand for ethanol goes up, spurring demand for corn. As corn prices increase, Southern farmers look to grains to take up some acreage they would typically plant in cotton. Consequently, cotton prices also increase with prospects of less production.

“Global factors also affect cotton and grain markets,” Pena says in his weekly ag economics update.

He says recent rallies offer growers “excellent pricing opportunities as they firm up planting intentions for 2008. Recent weaknesses in crude oil prices apparently influenced recent weakness in the grain markets, but a rebound in crude oil and continuing strong export demand for grains supported a late January market rally.”

December 2008 corn had dropped to less than $5 per bushel (Chicago Board of Trade) after reaching a high of $5.26. March corn futures jumped to “just over $5 per bushel (January 29) and December closed at about $5.10.

He says soybean futures were up on nearby contracts but lower on distant contracts.

July hard wheat was up to $9.67 on the late January rally.

Ethanol is moving the grain markets. “With corn closely tied to ethanol, changes in crude oil prices have a significant impact on grain commodity markets.”

He says market fundamentals may not favor a cotton market rally but some recent movement “appears to be associated with market spillover from grain markets.”

He says markets dropped by 4 to 5 cents as grain prices weakened and then improved by “about a penny” when grains rallied.

Pena says USDA's latest supply/demand figures for corn indicate a lower production estimate, 94 million bushels less, than the December 2007 report. That came with an increased estimate for domestic use, up 265 million bushels. Ending stocks are expected to be 359 million bushels lower.

He says ending stocks appear adequate (1.438 billion bushels) for the year but “are down 20 percent from last month's estimate (December) and down 28.1 percent from October, 2007. Once ending stocks drop below 1.5 billion bushels, the market becomes extra sensitive to changes in use and related world/national activities, which may influence the market.”

Exports will increase, up 325 million bushels, a 15.3 percent rise from 2.125 billion bushels last year. That, with reports of reduced production estimates from competing corn exporting countries and the high crude oil prices, spurred the market, he says. However, lower crude prices and improved weather in South America could weaken the market. Pena says worries in the United States over recession also may pressure grain markets.

“Globally, coarse grain supplies for 2007/2008 are projected 1.3 million tons lower than the December 2007 estimate, despite an increase of 1.4 million tons in beginning stocks.” World corn production estimates for that period are 2.6 million tons lower, mainly because of reductions in the United States.

Increased grain sorghum production in Argentina and increased corn, barley, oats and mixed grain production in the European Union partially offset the U.S reduction. Pena says a weak dollar and reduced global supplies “should support strong export demand and a strong market.”

He says a season-average price received by farmers is expected to be up 35 cents “on both ends of the range, based on the sharp rise in both cash and futures prices that has been sustained in recent weeks.” An average price received was projected at $3.70 to $4.30 per bushel.

Cotton pricing potential looks good for 2008. Pena says the domestic cotton market has been sluggish for several years but has “improved significantly, apparently influenced by improvements in grain markets. The outlook for 2008 appears bright as the market competes for planted acres this season. With record or near record prices for corn and feedgrains we'll see stiff competition for acreage.”

Pena says the cotton market was volatile in late January. “December futures rose to bump 80 cents a pound by mid-January, but dropped about a nickel to 75 cents. Weakness in the stock market, the potential for a U.S. recession and the continuing crisis in the housing market (Cotton has wide use in housing construction.) will continue to influence a volatile cotton market.”

Pena says potential for reduced cotton acreage in 2008 and continued good export demand bodes well for the 2008-2009 cotton market. “Current prices for corn, wheat, soybeans and sorghum favor those crops at the expense of possible reduced cotton acreage. Lower production and a relatively strong export demand should support a relatively strong 2008-2009 market.”

USDA's Jan. 11 supply/demand report put production marginally higher, exports lower and ending stocks higher. Production increased by 46,000 bales to 19 million. Domestic mill use was unchanged. Exports dropped 200,000 bales, to 16 million.

Pena says the export lag resulted from sluggish shipments and lower imports by China.

“Ending stocks were raised nearly 3 percent from December to 7.9 million bales.”

He says the USDA global report indicates lower beginning stocks, lower production, lower consumption, lower trade, and lower ending stocks.

“Reduced global ending stocks and potential acreage shifts away from cotton would support a potential for prices to remain relatively strong in relation to the last few seasons,” Pena says.

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