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Cotton forecast & caveats of 2007-08

Jan '07
Looking ahead to new crop outlook, the conventional forecasting approach is to make assumptions based on historical averages. My outlook for 2007/08 suggests a little to no change U.S. stocks-to-use, even when accounting for a large expected decrease in U.S. planted acres. Such a forecast provides no supply/demand 2007/08 New York futures to trade much higher or lower than 2006/07 (i.e., similar trading ranges for respective futures contracts).

For the week ending January 5, Dec07 futures traded between 5775 and 6000 (most of that on Friday). This is shown as the red line in the seasonal graph. Depending on whether 2007/08 is in fact a reduced carryover year (purple line) or another stable carryover year (green line), Dec07 could follow a stronger or more negligible 1st quarter price rally.

One major variable that will generate much speculation over the next six months is how much U.S. crop land will be bid away from cotton by high corn, soybean, and wheat prices. The latter is a result of various economic forces: 1) ethanol-fueled demand for corn, 2) short supplies of wheat world-wide, and 3) the familiarity/feasibility of planting corn, soybean, and soybean-wheat rotations in the Mid-South and Southeast.

Looking at representative projected costs and returns for cotton and alternative crops in the Delta, the breakeven farm price of cotton that returns the same income as feed grains and oilseeds seems unrealistically high. That is, assuming growers' expected yields, costs, and grain/oilseed prices are similar to those projected by Mississippi State University, there is a strong economic incentive for switching away from cotton. Based on conversations with growers in Texas, the Delta, and the Southeast, the economic incentive for cotton growers to increase acreage of corn, sorghum, soybeans, or wheat is widespread.

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