The recent supply and demand estimates issued by the USDA were slightly friendlier to the cotton market than previous reports had been. Exports were left unchanged for the 1997 crop (at 7.3 million bales) but domestic mill use was adjusted upward to 11.5 million bales. This reduced projected 1997 carryout to 4.2 million bales. This still is a lot of cotton to absorb. And one should continue to wonder about the softness of the projected export number given the current Asian economic difficulties. None- the-less, any reduction in 1998 carry-in should be supportive of new crop prices.

A carry-in of 4.2 million bales is a fair bit larger than we've become accustomed to dealing with in the recent past. (The 1990-96 average carry-in 3.2 million bales.) We clearly needed to reduce 1998 production and, thus, supplies if we're to improve price prospects for next year's crop.

The National Cotton Council issued results of a prospective plantings survey on January 30, 1998. This report was quite accurate last year when compared to actual plantings and is considered a fairly reliable starting point on acreage estimation. (In fact, at this point, it's the only game in town!) The results of the survey are posted on the New York Cotton Exchange's web site

The report indicates big acreage reductions in 1998, especially in the Mid-South. It pegged 1998 upland acreage at 11.86 million acres and total cotton acres at a touch more than 12.1 million. This is a huge reduction from the 13.8 million acres planted last year. Southern acreage held the best but declines of seven percent are expected to slightly under 3.0 million acres. South Carolina's acreage was left virtually unchanged with a 1,000 acre decline from the 290,000 planted in 1997.

Table 1 shows the resultant 1998 supplies available for utilization under three scenarios; low, average and high yield levels with the assumption of the 1998 planting prospects minus an average abandonment. The yields are taken from the 1990-96 U. S. average plus or minus a standard deviation. If yields are normally distributed, then there is a 2/3's change that actual 1998 yield will fall in the range between the low (586 pounds per acre) and high (712 pounds per acre) yield estimates. In all scenarios, 1998 supplies would be significantly less than the 1997 supplies and only the high yield scenario is larger than the 1990-96 average. For price support, this is a step in the right direction. Particularly if one considers that 1997 projected utilization is pegged at 18.8 million bales and average disappearance has been 17.5 million bales since 1990. If utilization holds at average levels, then an average yield would reduce stocks into the 1.5 to 3.0 million bale range. These stock levels have tended to be associated with prices in the mid to upper $0.70's and above.

So, what to do with the 1998 crop? Clearly, Southern producers cannot afford any further erosion of price given our typical yields and costs of production. This screams "protect yourself!" But, if acres truly decline as indicated in the Cotton Council's survey, I'd be reluctant to lock out the ability to benefit if prices increase. I prefer a combination position of fixing the price on what we KNOW we'll be able to grow (if basis is favorable) and then buy call options to reopen the top. For the yield we would normally expect but can't be sure of, I'd prefer to buy put options. With this approach, the typical operation in typical production conditions could rest assured that most or all costs are covered while still open to benefiting if the higher prices come.

Table 1. U.S. Cotton New Crop Projection 1
Item (units)	Projected 1997 (97-98)	Recent Average 1990-96	Recent Std. Dev. 1990-96	Low Yield 1998 (98-99)	Average Yield 1998 (98-99)	High Yield 1998 (98-99)
Planted (MA)	13.82	14.05	1.47	12.13	12.13	12.13
Harvested (MA)	13.28	12.97	1.56	11.20	11.20	11.20
Yield (Lbs/Ac)	686	649	63	586	649	712
Carry In (MBls)	3.97	3.21	0.82	4.20	4.20	4.20
Production (MBls)	18.98	17.42	1.55	13.66	15.14	16.61
Total Supply (MBls)	22.96	20.76	1.52	17.86	19.34	20.81

Source: NCC survey &USDA, WAOB, WASDE-335-13, February 11, 1998 and previous USDA data.
¹ Low (High) means period average minus (plus) a standard deviation

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updated 2/18/98