The latest USDA report indicates there is plenty
of cotton to meet world consumption needs for the
2007/08 crop. Thus, a sluggish market is expected.
With the December '07 futures expiring under 60
cents, the March '08 contract will likely continue
trading in the low to mid-sixty cent range.
Equities offered for cotton placed in the CCC
loan are expected to be only a few cents, if any.
Market prices appear just high enough to pay
storage costs. Keep alert for day-to-day, technical
moves that may be strong enough to provide a price
slightly above loan value. The market (futures and
cash) needs to be watched closely for opportunities
to sell.
World ending stocks were increased slightly,
mainly because of weakening consumer demand.
Foreign economies are slowing a little because of
economic and policy reasons.
The big question is how much cotton acreage
will be planted in the U.S. next season. Alternative
crops continue to offer favorable prices compared
to cotton. Cotton acreage might slip below 10
million acres. Texas is the only state where
2008/09 acreage may remain stable. The Delta
states have the greatest flexibility to reduce cotton
acreage. The Southeast and Western regions will
also reduce cotton plantings. Two seasons of sharp
cuts in cotton acres will tighten U.S. carryover
stocks substantially for the 2008/09 crop.
With foreign acreage expected to remain stable
next year, the key to the U.S. price is how much
cotton foreign countries will import from the U.S.
to fill the USDA 2007/08 projected 24 million bale
deficit gap between production and consumption.
If the U.S. acreage is 10 million or less next
season, production of 16.3 million bales would be a
good crop. However, only 4.5 million is needed for
domestic use. That leaves about 11.8 million bales
plus, say, 7.7 million carried over from the 2007/08
crop. The total available 2008/09 exportable supply
would be around 19.5. A carryover of 4 million
bales is fully adequate to fill specific quality orders.
The result strongly indicates a world price ("A"
Index) in the vicinity of seventy cents.
In the past, the U.S. futures price has averaged
some 5 cents per pound less than the world price.
The world price could rally substantially if growing
conditions threaten yields in any major producing
country.
Foreign production and consumption have little
reliable information from which to project expected
supply and demand. There is the possibility that
world consumption may be overestimated and
production underestimated. The market is still not
very concerned that 2008/09 supplies will be short.
Marketing strategies should include placing a
floor on favorable price moves while allowing the
benefit of a higher price. Options are the primary
pricing tool. Options and futures can be used to
place synthetic puts. Various types of spreads will
also be useful. An export-driven market makes for
unexpected market moves.
Best Wishes for a Happy Holiday Season and
a Prosperous New Year!
