March 19, 2007
Potential Record Drop in Cotton Acreage this year...
"We are seeing the largest acreage shift in our lifetimes." That's a quote from a seed dealer covering the Southeastern United States, referring to farmers in the USA (and maybe worldwide) intending to abandon other crops and plant more corn this spring. That same individual also cited a 62% decrease in cotton seed sales and a 72% increase in seed corn sales.
Why is this happening...?
It costs about the same to raise an acre of corn as to raise an acre of cotton...But with corn currently at $4.00 a bushel and cotton at 55 cents a pound, PLANTING CORN THIS YEAR SHOULD PAY THE FARMER ANYWHERE FROM $180-$200 MORE PER ACRE, for every acre planted, than he'd get for planting the same land in cotton...Take just a smallish 500 acre farm and you are therefore talking an extra $90,000 to $100,000 in revenues (with the same costs) for planting corn as opposed to cotton...not to mention that corn is a lot easier and less labor intensive to grow than cotton. With corn at historical highs and cotton at historical lows, it makes sense to expect some switching from cotton to corn...But I had no idea how big the shift might actually be...
The quote above prompted me to spend last Thursday and Friday (March 15 & 16) calling cotton people all over the country. Using a USDA map of where cotton is grown, and a list of cotton gins throughout the USA, I specifically targeted the heaviest cotton growing areas in each cotton producing state. Talking primarily to ginners, I asked them all the same question: "Are you seeing much change in cotton acreage around you this year as we head into planting season?"...And over and over I was astounded at the STUNNING percentage decreases people were citing. It appears we are going to see a MASSIVE cutback in cotton acreage in the coming year. The results of my totally non-professional (but I think highly representative) survey can be seen on the map following...
Everybody I talked to was able to give me percentage estimates and those are the numbers you see on this map.
No, I did not talk to 1000 households and I am not a professional crop estimator. All I know is, when a ginner tells me, "Last year we had 22,000 acres ginned here and we're just hoping se can get 9,000 right now", he probably knows exactly what he's talking about...Or that being told more than once, "Some of our biggest cotton producers last year aren't planting any cotton at all this year" is highly significant....As well as "Everybody who can plant corn (or grain sorghum) is doing just that" or "Anybody who has irrigation is going to corn or grain sorghum." The bottom line is that ANYWHERE they can switch, they are doing so, with water availability/irrigation and soil type being the deciding factors (which is why south Georgia and south Alabama are not down much)...In the end, it's the extra dollars they can get for corn and they are all understandably saying, "Thank you. I'll take the extra $200 an acre."
On Friday, March 30th, the USDA will announce its planting intention numbers for all US crops...and the estimates I have seen so far for cotton are calling for about a 15% decrease in acreage....However, when I took last year's state-by-state planted acreage numbers, and, using the percentages given to me by those ginners (in the process actually adding 10% to the figures I'd been given in each area) I came up with something like 10.7 million acres to be planted in cotton this year, down about 30% from last year's 15.3 million acres. I have no idea what the report's numbers will show, but I would guess, if the USDA number is down anything approaching 30%, we could easily see cotton trading limit up (3 cents) for any number of days...
It scares the hell out of me to even be attempting to estimate this report on my own, and I know my survey could be called anything but scientific, but I do know I was talking with real people who know what's happening in their own little areas (usually 3 to 4 counties) of the country, as I said, in the heart of our biggest producing areas, and I did so from coast to coast.
I should also add...very importantly...in spite of the acreage reductions they were seeing around them, NOT A SINGLE PERSON I TALKED TO THOUGHT COTTON WAS GOING UP FROM HERE.... EVERY ONE OF THEM TALKED ABOUT "TOO MUCH COTTON" LEFT OVER FROM LAST YEAR...(!!!!!!!!!!!!!!!!!!!!!).
Friends, as I've said before, I have NEVER seen a commodity bottom where there wasn't a mountain of the stuff around...But that mountain is why the price is low TODAY (not in the future) and seeing that mountain is exactly why nobody ever wants to touch it when a market truly (finally) is a "buy". Whatever the commodity, that mountain ALWAYS gets smaller and the commodity therefore gets more valuable...Low prices stimulate demand (and world demand IS growing 3-4% a year)...And low prices discourage production (which is obviously happening here).
Cotton is a buy...and I think it is a big time buy...And it should be bought now, the sooner before the March 30th report the better. Every now and then, there's a commodity report released that does TOTALLY blow the roof off...and I think this could be the case with this one. Obviously I may be dead wrong, but this market has been laying here for 3 years now. Every bull there is (save one) has long since been broke, busted and disgusted...NOBODY ELSE (nowhere) is on this trade. GET ON NOW.
Some charts and option prices....
For the record, since 1965, there have been three occasions when cotton acreage dropped around 30% from one year to the next...and all three resulted in sharply higher prices in the year to eighteen months following...In fact, twice it doubled in price and on the last go round (1983), it rallied 25 cents.
I'll bring the next item back from my January 25th report...
The next chart should help make clear why one might expect world Cotton acreage to decline...With Corn only higher than this once in history, and Cotton at lower levels than 95% of the past 30 years, doesn't it make sense to expect a significant percentage of acreage, worldwide, to be switching out of cotton?
And here is where I recommend you do your buying...In both the July and December contracts....