Commodity Prices Are Dictating Acreage

By Doug Starr

The National Cotton Council's planting intentions survey showed a cotton grower community that was responding to a combination of rallying grain prices and lackluster cotton price performance.

The Council's numbers, released February 2, showed that U.S. growers intended to plant 13.6% fewer acres than last year. To a particular ginning operation, cotton marketer or warehouse, fewer local acres might not be welcome news. However, most industry observers agree that the U.S. needs a reduction in domestic cotton supplies. The Council's survey pointed in that direction, but perhaps not as emphatically as it should have.

Assuming an average abandonment rate and state-level average yields, NCC forecasted a 2007 crop of 20.66 million bales - down less than 5% from 2006. A new crop of 20.66 million bales would replace every bale used in 2006, plus a little, keeping stocks high, unless consumption accelerates significantly. From this perspective, it is no wonder that prices came under pressure in the immediate aftermath of the Council's report. However, I would "take the under" on the 20-plus million-bale crop prospect and also suggest that usage in excess of 20 million bales should be achievable.

The first issue is planted acreage. Corn prices have continued to rally since grower surveys were collected, finally breaching the $4 per-bushel barrier in mid-January. Observers in the Mid-South, Southeast and Texas tell us that they believe the shift out of cotton has been underestimated, noting that local growers' enthusiasm for planting corn seems limited only by the availability of planting seed. Even in the Far West, corn has become a phenomenon, and it seems that competition for acreage from myriad other crops has intensified as well. To be fair, Calcot's number for planting intentions came in close to the Cotton Council's. However, I'm suspicious that March's prospective planting report could hold larger than normal surprises.

In terms of yield, forecasting three-year averages is a reasonable approach for this time of year. However, it may be optimistic too. Anecdotal evidence suggests that the area being shifted out of cotton is tending to be the better yielding acreage in general and the irrigated acreage in particular. What this means will depend largely on future weather.

Given average-to-worse growing conditions across the belt, a U.S. crop below 20 million bales should help lead prices higher in an environment where world stocks and foreign exportable surpluses of cotton will finally begin to tighten. However, the relatively high stocks levels at the end of the 2006/07 crop year will tend to keep bullish enthusiasm in check and also keep the onus on the 2007/08 crop to prove that it is not another big one.