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World stocks continue to cloud near-term outlook for cotton future

The pain for cotton may not be over — $13 soybeans, $6 corn, and 10 million bales of carryover at the end of the 2007 marketing year July 31 are all weighing on prospects of cotton price improvement.

“Cotton is going to need to have a price rally if we're going to hold on to acres in 2009, or we've got to come off these high corn and soybean prices,” Gary Adams, National Cotton Council economic services, said at a joint meeting of the Southern Cotton Ginners Association and the Delta Council's Ginning and Cotton Quality Improvement Committee.

“Yesterday (July 23), the December 09 cotton contract was at 85.40 cents, corn was at $6.13, soybeans at $13.56,” he said. “If that price situation continues, and we keep seeing increases in input costs until time for planting decisions to be made next spring, we probably could see growers moving a few more acres out of cotton — which would put even more pressure on the infrastructure.”

There's “not a lot of good news” in the cotton outlook near term, Adams said.

“With crude oil prices moving between $125 and $145 per barrel, energy costs are a major factor for everyone. We're expecting these costs to remain at about current levels through 2009.

Looking at USDA data for cotton variable input costs across the Cotton Belt, excluding ginning and land rent, machinery costs, overhead, etc., he said, “it looks like about another 10 cents per pound in costs of production, just for these variable inputs. In the Mid-South, that equates to about $100 per acre just for fertilizer, energy, and chemical costs. All this translates into a significant squeeze on the bottom line.”

Cotton prices in early March “got a lot of attention, but we've since backed off those, and now are generally talking about New York futures trading in the low 70-cent range, and the A-Index of international prices trading in the upper 70s. For the last several weeks, the market has been trading in a sideways pattern.

“In the near term, one of the things that continues to weigh on the cotton market is the stocks on hand at the end of the current marketing year July 31. USDA is estimating a bit over 10 million bales of carryover, and with that level of stocks, the market apparently feels short term there's enough cotton on hand to meet demand. So, we've got some stocks to work through before we can talk about the light at the end of the tunnel for cotton prices.”

But with a forecast for continuing strong world demand and mill use, Adams says, the situation could be different at the end of the 2008-09 marketing year.

“In early July, USDA was estimating 14 million bales of U.S. production for 2008, which would be a significant drop from last year's 19 million. The first USDA survey-based estimate, around Aug. 10, will have the market watching closely to see where the estimate will go in relation to that 14 million bales. Some industry estimates are a little below that, based on weather concerns in Texas.

“If things go well between now and harvest, 15-plus million bales is still possible, or if things take a turn for the worse over the growing season, 12 million bales is possible. In the Mid-South, we're probably looking at a crop of around 4 million bales. With the sharp acreage cutbacks in Mississippi, we're probably talking about only 700,000 bales for that state.”

As of July 20, Adams said, reports showed the Southeast crop better than a year ago; in the Southwest, some substantial losses in Texas; and in the Mid-South, the amount rated good to excellent was not as good as last year.

“In general, the U.S. crop is not as good as a year ago. A lot of what's happening in the market is driven by Texas, which represents 51 percent of U.S. acreage this year. Their yield variability and the amount that's abandoned from year to year, can be substantial. Plus or minus 20 percent on yields is not uncommon, and harvested acres can change anywhere from 3 percent to 40 percent — all that variability throws quite a bit of uncertainty into what the overall U.S. crop is likely to be.”

Assuming a crop of around 14 million bales for the 2008 marketing year, Adams says, “mill use and exports should exceed that by a fair amount, somewhere around 18 million to 19 million bales. That will change the ending stocks situation a lot a year from now — probably down to 5 million to 6 million bales. That has the potential to make the market look a lot different next July 31.”

Another wild card, he says, is the futures prices growers will be seeing when they're making planting decisions in spring 2009.

“Looking at February-April harvest-time futures prices for cotton, corn, and soybeans over the past several years, in spring 2006, cotton was 58.71 cents, corn $2.62; soybeans $6.10. In 2007, cotton was 57.98 cents, corn $3.97, soybeans $7.97. For 2008, cotton was 82.54 cents, corn $5.75, soybeans $12.79. Going into the 2008 spring season, cotton prices had increased from previous years — but they hadn't gone up to the same extent as corn and soybeans, and we saw another 15 percent decline in U.S. cotton.

“For 2009, the December cotton futures price is 85.40 cents, corn $6.18; and soybeans $13.56. If these prices hold, and input costs keep rising, we could see more acres going out of cotton.”

Also yet to be determined is how much the rest of the world will adjust to U.S. cotton trends.

“We've not seen a lot of adjustment yet,” Adams says. “ In 2007, U.S. cotton acreage was down 29.1 percent, but in the rest of the world only 1.8 percent. In 2008, U.S. acreage was down another 14.6 percent, the rest of the world only 0.8 percent.

“We'll learn over the next three or four months what these other countries have done in response to the U.S. cutbacks. We know U.S. acreage has shifted because of stronger prices for grain and soybean prices relative to cotton. We weren't seeing a lot of that in other countries until the last few weeks. Reports coming out of China, India, Turkey, and other big producers are indicating reduced acreage, and that's another development that has a chance to get the attention of the market once we learn more about what they've actually done.”

Based on a 14 million-bale crop, the United States is probably looking at somewhere around 5 million tons of cottonseed for 2008, Adams says, with lower availability in than in 2007. “If grain and oilseed prices stay strong, and strength continues in the vegetable oils markets, we'd have to think cottonseed prices will continue strong.”

Going into the 2008-09 marketing year, “It's clear the world crop is not going to be as large as world consumption of cotton,” Adams says. “We're going to chew through some stocks. Hopefully, we can continue to keep demand strong. The economy is always going to be a concern, as are higher energy costs and more competition for the consumer's dollar.

“We're in a situation where the fundamentals are different for cotton and grains. Cotton stocks aren't tight, grain stocks are. The situation could be different 12-18 months from now, but we're going to have to work through some stocks going forward.”

World Trade Organization negotiations, which have been going on for years, “are now at something of a make-or-break point in terms of trying to achieve some kind of closure,” Adams says.

NCC President Mark Lange, Chairman Larry McClendon, and Counsel Neal Gillen are attending the talks.

“There is continuing pressure on the U.S. to hammer out a trade agreement that will ultimately set limits on what we can do in terms of supports and farm programs. It will also set limits on what can do in terms of market protection. The U.S. is under a tremendous amount of pressure to scale back what will be allowable support levels, both in general and cotton-specific.

“We're continuing to take the position that if there are any changes on domestic support, they've got to be met with market access. For the U.S., that means opening up China's markets — getting better at relaxing tariffs and getting larger quotas. I still think the odds are against a breakthrough occurring, but if it should, we'll have a lot of concerns as to whether it's good for U.S. agriculture, and we're clearly doubtful it will be positive for U.S. cotton.”

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