The 2007 cotton season has commenced and it is anticipated that the Australian crop size will be around 1.1 million bales representing a 58% reduction on the previous season's 2.6 million bales. It is expected that 2007 will be the lowest level of cotton production in the last 20 years. Continuing drought conditions and low pricing were cited as primary causal factors.
Increased useage of farmland designated for corn production in the US could potentially impact domestic production. Longer term, U.S. and world fundamentals for the coming 2007/08 marketing year point to a tighter market and the potential for a rebound in prices further into the fall. In the U.S., the fall harvest is projected to shrink 13.0%, owing to the largest decline in plantings in a decade. Reversing course from the current marketing year, demand is anticipated to jump 20.7% on the strength of near-record exports. Pending redemptions from the CCC loan and early-season export sales suggest the new marketing year will start with an ample supply of exportable cotton. Coupled with recent reports that forecast China importing upwards of 23 million bales next year, U.S. exports could likely climb substantially from this year’s level. While the export outlook for next year is robust, U.S. mill demand is projected to slip 500,000 bales from this year to 4.4 million, owing to anticipated growth in imported textiles and apparel in 2007 and the absence of the Step-2 program. On balance, with lower supply and higher demand likely next year, U.S. ending stocks are expected to fall 33% from this year to 6.4 million bales, tightening the stocks-to-use ratio from this season’s 52.3% to 29.2%, a trend typically associated with strengthening in price.
Similarly, the outlook for new crop world fundamentals mirrors the U.S. outlook. World production is forecast to decline marginally to 116.0 million bales, driven by the smaller U.S. crop. World demand is projected to jump 4.0% to a record 127.0 million bales, driven by growth in Chinese mill demand. This 11.0 million-bale gap between demand and production is anticipated to drop world ending stocks to 50.7 million bales, the lowest level in five years, effectively tightening the stocks-to-use ratio from 45.4% this year to 39.9% next year, creating the opportunity for prices to climb beyond the staid levels seen over the last two years.
Prices have weakened over the last month in the absence of any near-term fundamental support. Each NYBOT contract reached life-of-contract lows earlier in May, and the Nearby remains weighted down below 50 cents, its lowest level in ten months. The combination of possible continued erosion in old crop fundamentals and the likelihood of large numbers of CCC loans expiring before harvest suggests prices may not benefit from tighter U.S. and world fundamentals until further into the 2007/08 marketing year. Longer term, the resounding outlook for tighter fundamentals for the next marketing year—domestically and worldwide—supports the opportunity for prices to climb above average levels seen over 2006/07. |
