Johnson On Cotton: Urea Prices Further Depressing Cotton Acreage
Looking toward the upcoming NASS planting report on Friday, June 29, reports are become more widespread across the Southeast and Delta regions of producers switching corn, cotton and rice area to soybeans. Since Mar 1, May soybeans have gained 1.46 cents (low to high) with the November contract, up just over 1.15 cents.
The price rally, though, does not paint the entire picture as soybeans are not just up but at the current price of 14.46 and 13.80 with May and Nov respectively, very high priced.
Corn and cotton prices, old and new crop, are sideways to down over the same time frame, making these two crops less desirable despite the very high fixed price with the revenue insurance available with cotton. In addition, high input costs such as urea, a key component in fertilizer has risen to such a level that per AgFax, rice producers are also moving to soybeans. Soybeans do not require nitrogen, unlike corn, cotton and rice. So, if it has not been applied, soybeans can be planted instead.
Weather is and will continue to be a critical component for the SW region as average if not above average rainfall will allow more area to be devoted to other crops than cotton such as sorghum in South Texas. If conditions remain as dry as they currently are in the High Plains, producers will follow last year’s path and plant more cotton since insurance programs will guarantee a high price despite its costs.
Nearly every commercial I have spoken with in the past two weeks is anticipating a loss in cotton area from the March Intentions to the June Planting in the SE and Delta regions with the Southwest a coin toss. As for the Far West, since final water allocations were not until near the end of the survey period, a further decrease is expected in Calif.
As to yields, cotton can survive in periods of low/no rainfall with little impact if only one season is involved meaning planting or growing but not both. If El Nino returns this fall as some early talk suggests, rainfall will be above normal, not what is wanted during harvest. The start to planting is worrisome but not critical yet. Weather over the next few weeks will play a huge role in how well cotton is situated going into this summer and ultimately if the final crop size is closer to 18 mln vs 16 mln bales.
Once commercials and funds finish the bulk of their rolling, delivery possibilities will play a much larger role in how the May trades in the last 7 sessions. In addition, with more puts in the money than calls, additional buying as puts are exercised is likely but that phenomena should only be in place for a day or two early next week. The bigger question for those long or short in July is will it repeat the rally just prior to its FND as was the case with Mar and May. How well US exports hold up if not advance will dictate if the trade wants to take delivery vs those who may want to make delivery. Plus, how well weather is cooperating here and key producing countries such as China, India, Pakistan, etc could influence hedgers’ decisions re: owning cert stocks.
Sharon C Johnson, @Copyright 2012
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