Traders expectations indicate positive market into harvest 2007

03 Mar '07

3 min read

Cotton prices continued the gradual climb that began eleven sessions ago. While the short term view calls for further upward momentum, the remaining old crop contracts, May and July, will continue to be range bound, trading between 52 and 55 cents. One should expect the New York May contract to trade at both ends of the range.

While demand for US cotton, both domestic use and exports, continues weak in the face of an 8.3 to 8.6 million bale carryover, traders expectations indicate a more positive market into the harvest of the 2007 northern hemisphere crop.

The annual USDA Ag Outlook Forum, held this week, gave us a brief preview of what to expect in next week's USDA March Supply Demand Report. Projections called for 2006-07 exports to be 14.5 million bales with domestic consumption placed at 5.0 million. Thus, US carryover stocks will likely remain at 8.3 million bale bales, the same as projected in the February supply demand report.

USDA projected 2007 plantings at 13.0 million acres, including upland and pima plantings-a decline of 2.3 million acres from 2006 plantings of all cotton of 15.3 million acres.

Despite the reduction of world planted acreage in 2007, world production is expected to increase some 400,000 bales, climbing to 117 million bales. However, world consumption is expected to increase 3.7 million bales, climbing to 125 million bales. Thus, the world production consumption gap is forecast to be 8.0 million bales.

Such agap, taken by itself, suggests a strong price increase. Yet, for now while a price increase is likely in store for 2007-08 world cotton prices, the increase above 2006-07 prices will be limited due to the large world carryover facing the market. World carryover is expected to decline only 3.5 million bales, down to 49.4 million. A 50 million bale carryover represents a 40 percent stocks to use ratio, a bit high to allow a "significant" price increase.

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