Looking ahead to new crop outlook, the conventional forecasting approach is to make assumptions based on historical averages. A resulting forecast for 2007/08 suggests a little to no change U.S. stocks-to-use. Such a forecast provides no supply/demand 2007/08 New York futures to trade much higher or lower than 2006/07 (i.e., similar trading ranges for respective futures contracts).
For the week ending January 5, Dec07 futures traded between 6050 and 5850. This is shown as the red line in the seasonal graph. Depending on whether 2007/08 is in fact a reduced carryover year (purple line) or another roughly stable carryover year (green line), Dec07 could follow a stronger or more negligible 1st quarter price rally.
One major variable that will generate much speculation over the next six months is how much U.S. crop land will be bid away from cotton by high corn, soybean, and wheat prices. The latter is a result of various economic forces: 1) ethanol-fueled demand for corn, 2) short supplies of wheat world-wide, and 3) the familiarity/feasibility of planting corn, soybean, and soybean-wheat rotations in the Mid-South and Southeast.
Cotton is a relatively risky and management-intensive crop, so given a poor relative price, it is reasonable to expect acreage shifts. However, investments in harvest equipment, ginning operations, plus landlord constraints are things that will limit cotton acres from shifting to feed grains and oilseeds.
In addition, cotton growers may be reluctant to reduce acres significantly prior to the next farm bill. I am assuming that these constraints are reflected by historical plantings, and then select the lowest planted cotton acres (13.4 million) in the last ten years as a tentative forecast of next year's plantings. The first survey-based planted acres estimates will start appearing in the first quarter of 2007, culminating in the USDA Planted Acres Report on March 31, 2007.
marketing@alchempro.com
