Does Lower Acreage Mean Higher Prices?
February 11, 2009 Without question the hottest topic at this year’s Beltwide was cotton acreage for 2008. Cotton Grower’s annual grower survey published in the January issue called for only a slight drop in ‘08, down to 10.596 million acres from USDA’s final ‘07 figure of 10.847 million. Speculation in Nashville ranged from a low of 9 million acres, to a high of 10 million, but that was before the December contract on the New York Board of Trade broke the 80-cent barrier. Other commodities prices continue to climb as well, so acreage decisions could be made as late as planting time.
As always, supply and demand will dictate where the market will go from here, but everyone agrees that demand is increasing faster than production.
“While the final decision about which crop to plant takes into account a number of factors beyond relative prices — such as expected yields, input costs and rotational constraints — it is evident that the market was encouraging more acres of other crops,” said Dr. Gary Adams, NCC’s Vice President of Economics and Policy Analysis. “A simple comparison of futures prices for the harvest-time contracts at planting time shows the increased competition for acreage.
“ … The adjustment in U.S. acreage undermines criticisms that we hear about the U.S. cotton program — particularly in the international arena. It is clear that U.S. producers do respond to market signals and adjust acreage accordingly. Second, it begs the question as to why there have been no responses by other countries.”
Looking Ahead to 2008
Since the ’07 planting season, cotton prices — based on the price at the time of Beltwide — have improved, “with the December ’08 contract trading roughly 15 cents above last year’s December contract,” said Adams. “However, the competition from other crops is as strong, if not stronger, than last year. Based on current futures prices for the harvest-time contracts, soybeans and wheat are showing the most notable gains relative to cotton.”
While there are ample reasons to expect acres to fall further in ’08, Adams said there are also factors that could limit further declines. “(There) were significant shifts in ’07 and growers with vertical investments in gins and warehouses might be reluctant to make another significant reduction in cotton acreage,” he explained. “At this point in the year, much of this is still economists making educated guesses.
“… If current estimates are accurate,” Adams continued, “the ‘07 marketing year will be the first in five years with consumption significantly above production. … The fundamentals are generally supportive of prices.”
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