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2006/07 fundamental analysis summary

Feb '07
The old crop U.S. and world cotton supply/demand outlook remains framed by the January 12 USDA World Agricultural Supply/Demand Estimates (WASDE) report which forecasted U.S. average yield and production of, respectively, 819 lbs/acre and 21.72 million bales.

While the supply side of the picture is now more or less settled, U.S. exports is the main variable determining old crop futures prices (i.e., the Mar07, May07, and Jul07 contracts).

The January WASDE report lowered expected U.S. exports again, down to 15.7 million statistical bales, which is the cumulative annual amount expected to be shipped by July 31, 2007. The bottom line suggests a small increase in 2006/07 U.S. stocks-to-use relative to the previous marketing year. The change in U.S. stocks-to-use from year to year generally moves in the opposite direction of U.S. prices.

This implies a supply/demand rationale for '07 old crop futures contracts to trade in a similar to slightly lower trading range to their 2006 counterparts. However, these price depressing fundamentals could be supported by strength in Dec07 futures. Also, old crop futures could still rise (and fall) based on purely technical factors, as has been the case over the last two months.

The USDA numbers for the foreign and world situation project a decrease in 2006/07 world stocks-to-use by less than 4% down to 43.1%. Historically, such a move implies only mild support for the A-index of world prices. This suggestsa small chance of seeing the A-index reach the 66-67 cent level where the value of the LDP erodes away.

Texas A&M University, USA

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