It has been a tough year making money in the cotton business as a producer, but this coming year looks brighter. With the surging demand for corn and with corn prices near 10-year highs, corn acres in 2007 will expand by a record level, mostly at the expense of soybeans, but also cotton.
The boom in the ethanol industry has been the driving force behind the corn demand, but this exceptional growth will also have a positive impact on cotton prices this coming year because of declining acres.
Our estimate is that planted acreage of cotton this year will be approximately 12.9 million acres versus last year's 15.28 million acres. This is the lowest planted area since 1990, when U.S. producers planted 12.3 million acres.
With an estimated normal yield of 760 pounds per acre, this translates to a crop size of only 19 million bales, which would be the lowest production since 2003-04.
On the negative side, exports have been a drag on the market to say the least. At the same time, domestic usage continues to decline with this year's expected mill use of 5.35 million bales. Mill use is seen at only 4.9 million bales in the coming year.
The good news — even with declining usage, the drop in planted acreage will more than offset the lack of demand. As a result, carryover supplies are going to drop this coming year from an estimated 6 million bales this year to 5.15 million bales in 2007-08.
From a price perspective, that translates to an expected average price in 2006-07 near 53 cents and in 2007-08 near 55 cents. This compares to only 47.7 cents in 2005-06 and 41.6 cents in 2004-05.
World usage of cotton this year will be approximately 120.9 million bales versus last year's 115.8 and only 108.8 million in 2004-05. The trend is definitely favorable for usage (primarily because of China), but unfortunately the U.S. has lost market share of the increasing world demand.
Unlike corn, the U.S. cotton market does not dominate the world. This year's 2006-07 production is expected to be only 18.4 percent of the total world production. Last year U.S. producers accounted for 21 percent of world production and the previous year 19.3 percent. With acreage down in 2007, this number will only decline more.
The good news in this whole scenario is that cotton prices for U.S. farmers will be higher this coming year compared to 2006. While supplies are not tight enough to create a bull market similar to corn, producers who did not shift acres from cotton to corn will likely be rewarded this coming year.
With the high cost of inputs for cotton crops, an improvement in prices is certainly needed. This is not a year to be an aggressive forward seller in cotton.