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Sharon Johnson: USDA Report Preview

Thursday Trading Activity – US
cotton futures were on both sides of unchanged in the first 14 hours of the
session. Export data pushed prices higher only to run into selling and a loss
of buying until 11:30 AM EDT when buying re-surfaced and by enough to push the
two front months to limit up briefly. However, the May or Jul contracts closed
5 and 44 pts off of limit up and the December was only up 114 pts from a
futures volume of 27,798 and combined option volume of 16,479. Cert stocks are
shrinking a bit at 201,785 with only 2,556 under review.

PRE-USDA COTTON PLANTING
INTENTIONS – The National Ag Statistical Service arm of the National Ag Statistical
Service arm of the USDA will release the results of their surveys of US
producers regarding various crops including cotton on Thurs, Mar 31. As they
pertain to cotton, the industry range is 12.7-13.3 mln acres although I have
heard some extreme numbers above and below that range. The incredible move in
2010/ 2011 cotton prices to not only new all-time highs but nearly double that
of the 1994/95 crop year and its pull on new crop prices is behind the huge
jump in 2011/12 area in the US.

0325market1.jpg

This chart shows the rally in
old crop prices with the blue trend-line cutting across most tops since 1990.

After additional discussions
with maintaining my preliminary estimate at 13.2 mln acres.

Starting with the Southeast,
my forecast is for an increase of 493K acres to 3.09 mln acres, its’ largest
since the 2006 season. The increase is due to sizeable gains in NC, Ga, SC and
Al in descending order. NC and Al are seen planting their largest level since
the 2006 crop year. My 300K figure for SC is tied with that of 2006 and Ga at
1,440 is slightly above the 2006 level.

Moving onto the Delta, I
look for acres to jump of 2.475 mln vs the previous year of 1.92 mln, an
increase of 555K and its’ highest since 2007. Ms and Ark account for the lion’s
share of higher area with the two commercial sources, extension personnel, etc,
I am counting for 60% of the regional expansion. All states are expected to
show an increase above and beyond that planted in the 2008-2010 crop years.
Only Mo is likely to plant more than in the past 4 years.

Continuing westward, the
Southwest could see not only an explosion with area but possibly a multi-year
record. (As with most analysts, my figure is substantially above last year due
in large part to the significant increase in the Southwest and in particular
Texas.) My forecasted figure for Texas and the SW (including Ok and Ks) region
is 6.50 and 6.88 mln acres, both of which (if realized) would be their highest
levels in nearly two decades. In addition, if rainfall remains elusive well
into this spring, producers will plant even more cotton as it may be their only
choice. The ongoing dryness across the Southwest region is well known but
typically, the bulk of the rainfall across the High Plains which encompasses
1-N and 1-S districts occurs from May-Sept. Per a report titled Climatography
of the United States issued by two divisions within NOAA, the National
Environmental Satellite, Data, and Information Service (NEDIS) and National
Climatic Data Center (NCDC), 66% of the annual rainfall on the High Plains
occurs in these 5 months, 12.98 inches of 19.64 inches using data from 1971-2000.

0325market2.jpg

The Far West will also see a
huge increase in area, the only question being by just how much. Looking at
pima and upland cotton in Calif, this state will easily enjoy a 45-55%
increase; I have upland and pima up 66K and 71K respectively. Az and NM show
much smaller increases for a combined expansion of upland area by 104K to 470K
its’ largest since 2006. Pima, as mentioned above will also grow and by 76K
acres to 280K, a 4-year high. Upland area is forecast to expand to 12.92 mln
acres, 2.15 mln acres higher than 2010 and above that of 2007-2009 as well.
When Pima is combined, all cotton area is estimated at 13.20 mln acres vs 10.97
mln from 2010 and its’ highest since 2006.

I have been asked in recent
weeks, what could push US area much lower or higher? Obviously weather will
play a role in preventing some area from being planted in the SE or Delta if
dryness becomes a big issue where irrigation is not available. Dryness is
likely to encourage planting in the High Plains of Tx even if harvested area is
considerably lower. If Calif continues to experience one storm after another,
plantings would be delayed although every effort will be made to plant cotton
as is the case currently in Kern County.

Price will also play a huge
role in producers’ efforts especially given how much has already been booked
with merchants. If production fails to match what has been sold, producers will
have to ‘buy back’ that undelivered cotton; not a position any of them want to
be in considering the potential loss. Without going into a lot of detail, some
of the insurance programs offered with yield loss protection have a very high
discovery price, 1.15-1.23, and although this same insurance is expensive,
being able to recoup losses on 75-80% of one’s yield base at that price is very
desirable. In the event of production issues, here or abroad, it is possible
the discovery price during Nov 11 could be higher and after what happened Nov
2010, producers are enamored with cotton in a way I have not seen for far too
long.

There have been some recent
questions as well relating to Japan’s higher fuel needs in light of reduced
energy from their nuclear facilities. When combined with the political turmoil
occurring across the Middle East and northern Africa that could also lead to a
semi-permanent reduction in crude oil availability, pushing fertilizer and
diesel prices higher if they have not done so already. But, the vast majority
of producers have already priced most of their needs this spring/summer if not
longer so not a big concern in area for now. This could be a valid issue for
the upcoming crop year making the competition for acres all the greater.

U.S. Exports

Due to some accounting
changes involving China, old crop sales were unusually large with 334K bales
sold principally to Vietnam, China and Bangladesh in descending order. There
were a handful of cancellations involving Ecuador, Turkey and Indonesia but they
were quite small. As of Mar 17, commitments stand at 15.46 mln running bales or
101% of the USDA running bale equivalent of 15.29 mln. Shipments rebounded from
the preceding week with 415K bales leaving US ports/borders headed to China,
Turkey, Indonesia, Mexico, Thailand, Brazil, Vietnam, South Korea, Pakistan and
Colombia. After 33 weeks, 8.75 mln running bales have been shipped, 57% of the
official target vs 54% a year ago. New crop sales held up with 228K bales sold
to China, Turkey, Bangladesh, Mexico, Thailand and Pakistan. 2011/12 export
sales now total 4.52 mln running bales crop year, a record given the start of
the season is 4 1⁄2 months away.

US Mill Consumption

February consumption by
domestic mills was 287,761 running bales vs a revised 287,126 for January 2011.
The seasonal adjusted daily rate for the past two months was 14,339 for Feb and
14,431 for Jan. Year to date, US mills have consumed 2.10 mln running bales vs
1.86 mln a year ago or a gain of 12.9% vs the USDA of 2.9%. However, mills are
only now beginning to spin higher priced cotton so a decline is likely in the
last 5 months of the crop year. Per the NCC, January usage was adjusted
downward to an annualized figure of 3.88 from 3.91 mln with the Feb at 3.86
mln, the same as December.

Price/Impact commentary

The December 11 contract has
advanced by more than 50 cents from the third week of November to the highs of
mid-Feb/early Mar reaching not only a new contract high but the highest level
for any December in the first quarter of 2011. The anticipation of a huge jump
in area here and abroad has tempered its movement in the past 3 weeks with a
wide but sideways trend until weather becomes a factor. In addition, the link
between old crop strength and that with new crop appears to have broken down as
weakness in 2010/2011 demand due to the 2.00+ cotton price in many countries
with their own production and for those who import is becoming more obvious.
Cotlook is reducing its Chinese/global consumption figures from last month per
a press release from a major media source. I am attaching the story for your
review and as mentioned in my pre and post-USDA March 2011 supply/demand
report, I look for Washington to make cuts to their figure April forward for
many of the same reasons outlined by Cotlook. There was also a report out
detailing problems with the textile and apparel industry in Bangladesh due to
high cotton prices. This country is the second largest importer of cotton and
ongoing issues could restrict imports the second half of the crop year.

Besides the weakness (or
lack of ongoing strength) in the front months, the May/Jul spread is also
showing weakness as mentioned of late. Since the spread differences are driven
by commercials, they are a window into flat price action and for our purposes
suggest problems ahead for maintaining the bull rally. Some specs (and possibly
commercials) could be moving their longs forward in advance of next week and
the following when the index funds will begin their rolling process which in
turn is weighing on the nearby spread. Plus, given the importance of next
Thursday’s report, traders and as put by one source ‘trading firms are
adjusting their risk profile base don the potential of a limit up or limit down
price move. The surprise would be a tame market reaction.” Since cotton has had
more limit moves of late than all the other commodities thrown together, that
potential may not be all that meaningful, but here is the difference, whether
the Dec 11 has a limit move based on its own merits and not led by the old crop
months.

Note: NASS will release its
final ginnings report for 2010/11 on Fri, Mar 25 including bale weights and the
480-lb equivalent and therefore the final crop size of US cotton. This
production figure will be incorporated into the annual report due out May 11,
2011.

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