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Drop in intended plantings of all US cotton

Apr '07
The long-awaited USDA Prospective Plantings report on March 30 showed a 20% drop in intended plantings of all U.S. cotton to 12.15 million acres. The regional intended plantings of cotton were in line with prior expectations that a) Texas cotton shift would be within historical bounds, b) the Mid-South would have the largest shift out of cotton, and c) the Southeast would have a smaller shift than the Mid-South due to the more diversified SE cropping pattern.

Assuming the prospective plantings numbers for now, along with other assumptions, I can pencil out lower ending stocks of 5.66 million bales and a 2007/08 ending stocks-to-use ratio of 25.3%. Comparing the latter to prior U.S. stocks-to-use figures (e.g., 26% in 2004/05, 25% in 2005/05, and 43% in 2006/07), I would expect 2007/08 New York futures to range between the lower 50's and lower 60 cents.

Bad weather here or in China/Pakistan/India could run prices higher, but perhaps only in a knee-jerk fashion. A major driver of my current outlook is an assumption of 17 million bales of exports in 2007/08. USDA is currently forecasting new crop U.S. exports of 18 million bales. The arguments in favor of USDA's view are that 18 million bales lies within the upward pointing five year trend projection of U.S. exports, and also that the projected foreign stocks-to-use ratio will likely continue below 40%, continuing a three year trend of declining foreign stocks.

There are still many caveats to the U.S. market outlook. With Deep South corn planting winding down, the next phase of possible crop substitution should focus on how much cotton acreage will be replaced by Group IV soybeans. As with corn, the simple break even comparison strongly favors soybeans over cotton in these regions.

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