2010 Cotton Economic Outlook
NCC Annual Meeting
February 4-8, 2010
INTRODUCTION – Good morning. Thank you, Mr. Chairman, for the opportunity to present the Council’s economic outlook for U.S. and world cotton. Before I begin, I would like to recognize the Council’s economics staff for their hard work in preparing the outlook. At the conclusion of today’s session, the full report will be available directly outside of this room. In addition, the slides and script will be posted on the NCC website.
2010 OUTLOOK IN BRIEF – To begin my presentation, I’ll jump straight to the summary, and then backtrack with the details. The Council’s 2010 economic outlook for the U.S. cotton industry can be succinctly described as one of recovery. The consensus among macroeconomists is for the general economy to continue the recovery that began in the second half of 2009. However, as you will see, the recovery is not without downside risks. Cotton demand is improving after the sharp downturn in the 2008 marketing year. And, the Council’s annual survey of acreage intentions calls for more cotton across the Cotton Belt, reversing three years of decline. Barring unfavorable weather conditions, US production will bounce back as well. And with the assumption of trend-line yields, cotton’s balance sheet will continue to tighten.
KEY ASSUMPTIONS – To set the stage for the specifics of the cotton market outlook, it is important to review the underlying assumptions regarding government policies and the general economy. For government programs, the outlook assumes no major policy changes unless there are pending changes that have already received government approval. In the United States, commodity policy is determined by the provisions of the 2008 Farm Bill. For trade agreements of which the U.S. is a signatory, there are no assumed changes for 2010.
Policies in other countries also have a direct impact on the U.S. and world cotton markets. In 2008, India announced increases of 35 to 40% for their cotton minimum support prices and held those levels into 2009. At the time, those increases moved support levels well above world prices and sharply reduced their competitiveness in world markets. Although no formal announcement has been made regarding 2010 support levels, the outlook assumes no change from the current support levels.
China is assumed to continue to manage their import and stock policies in a manner that will support their internal prices at levels well above world prices. In addition, reports indicate that China is implementing increased support levels for grain production. That could serve to limit the increase in cotton area for 2010.
NCC economists rely on outside sources for the macroeconomic assumptions. As witnessed over the past 18 months, gauging the performance of the general economy remains a formidable task, and subsequently, a significant wildcard in the economic outlook. This outlook incorporates IMF projections released in January.
ECONOMIC GROWTH IN 2010 – The January IMF projections call for the world economy to expand by 3.9% in 2010, after a contraction of 0.8% in 2009. This year’s economic expansion will be followed by 4.3% growth in real GDP in 2011. The January projections for 2010 and ’11 are actually a bit more optimistic than their previous release in October.
Developing countries, particularly those in Asia, are expected to show more robust growth, while recovery in developed economies will remain sluggish and dependent on fiscal stimulus packages. China’s economy leads the way with projected growth of 10% for 2010. This follows on the heels of an 8.7% expansion in 2009. India’s economy is also viewed in a favorable light with expected growth of 7.7%. For the United States and the Euro area, the IMF projects 2010 real GDP to expand by 2.7% and 1.0%, respectively. It is worth noting that recently released numbers for the US economy put growth at 5.7% in the 4th quarter of 2009 after 2.2% growth in the 3rd quarter.
However, as most economists will do, the IMF was quick to point out the uncertainties regarding the projections. Specifically, they refer to the fragile nature of the recovery.
LOW CONSUMER CONFIDENCE – In terms of potential issues, concerns about consumer spending were at the top of their list. Although we’ve seen some improvement in consumer attitudes, their confidence in the economy is still well below where it was in 2007.
UNEMPLOYMENT REMAINS HIGH – One of the reasons behind that lack of confidence is the continuing loss of jobs. Yesterday’s release lowered unemployment to 9.7% for January after hovering around 10% in the later months of 2009. Unemployment are still double pre-recession levels and not expected to show much improvement before 2011.
CBO’s US BUDGET DEFICIT – The IMF also notes the increased levels of public debt. The US federal budget situation is a prime example with Congressional Budget Office putting the FY09 deficit at $1.4 trillion and little change in FY10. The large 2009 and 2010 deficits reflect a combination of factors: an imbalance between revenues and spending that predates the recession and turmoil in financial markets, sharply lower revenues and elevated spending associated with those economic conditions, and the costs of various federal policies implemented in response to those conditions.
COTTON DEMAND – Bearing in mind the policy and macro assumptions, let’s turn attention to the NCC’s projections for cotton demand. Projecting world mill use has always been a difficult task, in part because of the uncertainty surrounding the historical data. For example, China, the world’s largest processor of cotton, does not publish official estimates of mill use. Instead, analysts must approximate mill use based on data such as overall yarn production. In the current environment, gauging the recovery in mill use after such a sharp decline in the 2008 marketing year can prove to be particularly challenging.
After the downturn in the 2008 marketing year, an improved outlook for the general economy is supporting the recovery in mill use. Yarn values improved in the latter half of calendar 2009 as orders improved. Cotlook’s yarn index is up 25% from year-ago levels and 7% higher than late summer 2008, before the economic collapse hit.
Recent expansion in monthly textile trade values also support the estimates of improved mill use. After peaking at $55 billion in July ’08, world textile exports fell to $36 billion by May ’09, and have jumped back into the low $40 billion’s in recent months.
WORLD MILL USE REBOUNDING – Continued economic improvement will play a key role in demand growth. Over the past decade, there has been a fairly strong relationship between mill demand and economic growth. Between 2000 and 2002, the world economy grew at an average annual rate of 3% and global mill use expanded between 1 and 4% per year. Jumping ahead to the 2003-06 period, economic growth improved to 5% per year, and following a slight downturn in 2003, cotton mill use jumped for 3 years.
The period of growth was followed by 2 years of declining mill use, with ’08 decline reaching 10%. In this outlook, the NCC projects mill demand to rise by 3.1% in the current marketing year and increase by another 2.3% in the upcoming 2010 marketing year.
WORLD COTTON MILL USE – In terms of bales, we project world mill use at 114.6 million bales for the 2009 marketing year. , NCC estimates world mill use at 114.6 million bales, 3.1% higher than 2008. For the 2010 marketing year, the 2.3% growth brings mill use to 117.3 million bales. It’s worth noting that the growth this year and next does not erase the full extent of the 2008 decline, and as a result, mill use remains below the peak levels observed in 2006 and 2007. Another unknown at this point is the extent to which the rebound in mill use is due to stronger consumer demand or the replenishing of pipeline inventories. Again, the growth is predicated on the continued improvement in the general economy.
COTTON MILL USE (MIL BALES) – In terms of individual countries, we expect increased mill use in most countries. China’s textile industry, the largest processor, was not immune to the global economic downturn, falling 6.5 million bales in the 2008 marketing year. However, prospects have improved for the 2009 marketing year with mill use estimated at 46.8 million bales. Government policies and incentives under the textile stimulus plan supported their textile industry during the worst of the downturn. Recently, export markets have improved, as have the prospects for 2010 mill use. NCC projects mill use in the 2010 marketing year to reach 48.0 million bales.
The decline in India’s cotton use during the 2008 marketing year was not as pronounced as China, perhaps indicative of India being less reliant on textile export markets as an outlet for their production. For the 2009 marketing year, India’s mill use is expected to grow to 18.8 million bales, as compared to 17.9 million bales the year earlier. As India’s economy grows by more than 7% per year, cotton mill use will also expand. For the 2010 marketing year, India is projected to process 19.3 million bales, or 16% of the world total.
For mill use, Pakistan is the third largest country behind China and India. Together, the 3 countries account for two-thirds of world mill use. In the 2010 marketing year, Pakistan’s mill use is estimated at 12.5 million bales, up from 12.1 million in 2009. In the improving economic environment, countries such as Bangladesh, Indonesia and Vietnam will increase their use of cotton.
US COTTON MILL USE – For the US industry, the slowdown in the general economy compounded the pressure the textile industry has been facing due to imported textile and apparel products. Mill use in the 2008 marketing year fell to 3.6 million bales, down 1.0 million bales from 2007. Through the first half of the 2009 marketing year, the climate has improved and monthly numbers are exceeding year-ago values. In early calendar 2010, U.S. textile mills are consuming at an annual rate of 3.7 to 3.8 million bales. It is expected that calendar 2010 mill use will exceed calendar 2009. For marketing years 2009 and 2010, U.S. mill use is estimated at 3.4 million bales.
PRICES ENCOURAGING ACRES – With cotton demand on the upswing, will 2010 production respond to meet the increased use? With planting of the Northern Hemisphere crops commencing in the coming weeks, cotton’s competitiveness with grains and oilseeds has improved to its most favorable position since prior to the 2006 season.
Cotton futures are trading about 15 cents higher than year-ago levels while corn and soybean prices are at or below last year’s contracts. However, more than relative market prices influence acreage decisions. Ultimately, weather, agronomic considerations, and government policies can play a role in farmers’ decision. An overview of the Council’s production outlook will begin with the United States.
US ACREAGE INTENTIONS – As in past years, the NCC’s economic outlook incorporates the results of the annual planting intentions survey, mailed in mid-December 2009. Results, collected through mid-January, indicate that growers will plant 10.1 million acres of cotton, 10.3% more than in 2009. All regions are expected to increase cotton acres. The largest percentage increases in upland area are reported in the West and the Southeast, with smaller percentage increases in the Southwest and Mid-South. The recovery in cotton area is not limited to upland varieties as ELS respondents indicate that they will increase acres as well.
US COTTON PRODUCTION – However, weather will ultimately determine the final outcome for U.S. cotton production. For all countries, the outlook assumes normal weather patterns and yields in line with recent trends. For the U.S., average abandonment and yields produce a 2010 crop of 15.5 million bales, compared to 12.4 million in 2009. The crop breaks down into 15 million bales of upland cotton and 470 thousand bales of ELS.
US COTTONSEED PRODUCTION – A larger cotton crop also brings a recovery in cottonseed production. Assuming an average seed-to-lint ratio, cottonseed production is projected to increase to 5.2 million tons, up 1 million tons from 2009.
INT’L COTTON AREA – Stronger cotton prices are expected to bring additional acres into production outside the United States. However, the expansion could be less than initially anticipated despite world prices in the mid- to upper 70’s, and it further illustrates the tug-of-war occurring as a number of crops are competing for available land.
While additional country detail is available in the later sections of the report, the international projections for area and production will be summarized by examining China, India, other Northern Hemisphere countries and the Southern Hemisphere.
In China, seed cotton prices 50% higher than year-ago levels will attract more cotton acres in 2010. However, the expansion could be less than originally expected as increased government support will keep some acres in grains. Cotton area is expected to increase by approximately 5% above the 2009 level. Assuming trend yields, China’s cotton production is estimated at 33.8 million bales, 1.8 million bales above 2009.
Dramatic improvements in yields, coupled with expanded area, have allowed India to more than double cotton production in recent years. In 2009, India devoted more than 25 million acres to cotton and harvested a crop of 23.5 million bales. A stronger market and the certainty of the higher support prices contributed to the increased area. For 2010, cotton is again expected to compete for available land, but concerns about food security will dampen further expansion in cotton area. With area projected just 1.8% higher, an expected rebound in 2010 cotton yields is the primary factor behind the projected production of 25.4 million bales.
The remaining Northern Hemisphere countries (excluding China, India and the U.S.) accounted for 25.2 million acres in 2009. Major producers included Pakistan, Central Asia, and West Africa. Prior to 2007, the remaining Northern Hemisphere countries accounted for more than 30 million acres of cotton. However, a combination of lower cotton prices and competition from grain crops reduced area in each of the last 3 years. In fact, over the past decade, cotton area in these countries has closely tracked relative prices. Based on current price signals, 2010 cotton area in this region is expected to increase by 8.4%. Production is projected at 29.7 million bales, compared to 26.2 million in 2009.
In the Southern Hemisphere, which is primarily Brazil, Argentina and Australia, plantings for 2010 will commence in the latter half of the year. The resurgence in cotton prices is expected to induce additional acres and production. Across the Southern Hemisphere, production is estimated at 9.5 million bales, up from 8.6 million in 2009.
INCREASED WORLD PRODUCTION – With reduced area and lower yields, world cotton production for the 2009 marketing year fell to 102.7 million bales, representing the smallest crop since 2003. For the 2010 marketing year, the combined results of the regional and country-level projections generate a world crop of 113.9 million bales. While an 11-million bale rebound in production is substantial, the expected crop falls short of mill use at 117.3 million bales.
COTTON IMPORTS – Moving to cotton trade, imports fell in response to the decline in mill use in 2008. China fell to 7 million bales while imports by all other countries dipped below 25 million bales for the first time in recent history.
After the 2008 dip, world cotton trade for the 2009 season is increasing to 34.2 million bales. China’s imports are increasing to 9 million bales. In 2010, we do expect to see a further increase in world imports to 35.6 million bales, with China accounting for the increase in the total. Total imports by all other countries is stable as increased imports in countries such as Bangladesh, Indonesia and Vietnam are offset by declining imports by Turkey, Mexico and Pakistan.
COTTON EXPORTS – For exports, the decline in world trade in ’08 was absorbed by other exporters as US exports remained stable.
For the current marketing year, the recovery in trade is being met by exports from other countries as US exports are expected to fall to 11.6 million bales. The U.S. share of world trade is sharply lower in the current marketing year as India’s exports rebounded from the low 2008 level. However, it is also worth noting that expectations for US exports have improved through the year as early-season expectations were closer to 10 million bales.
U.S. exports are projected to increase in the 2010 marketing year to 12.1 million bales. With world trade at 35.6 million bales and U.S. exports at 12.1 million bales, the U.S. trade share remains at 34%. India, Uzbekistan and West Africa are projected to increase exports as their production recovers.
WORLD BALANCE SHEET – For the world balance sheet, it is important to note the gap between production and mill use in the current marketing year. As a result, stocks are declining by more than 9 million bales. For the10/11 marketing year, the NCC outlook calls for a further decline in stocks as the recovery in production still does not come up to the level of mill use. Remember that the balance sheet includes an Unaccounted of -2.5 million bales, which is factored into the change in stocks. Even with the unaccounted term, stocks are down another 900 thousand bales.
US BALANCE SHEET – The US balance sheet also shows a sharp decline in stocks by the end of the current marketing year. 3.7 million bales are the fewest since the 2003 marketing year and represents a dramatic change from the 10 million bales of stocks just 2 years earlier. It is also worth noting that stocks of ELS cotton will be less than 50 thousand bales by the end of marketing year. The smaller ’09 crop and a strong export path will essentially reduce stocks to pipeline levels.
For the 2010 marketing year, The NCC outlook calls for no change in U.S. stocks. The combination of 3.4 million bales of mill use and 12.1 million bales of exports are in line with the projected crop of 15.5 million bales.
STOCKS-TO-USE TIGHTENING – We have talked about the situation with US stocks. In China, the outlook is much the same with their stocks declining both in the current marketing year and in the 10/11 year. For the current marketing year, stocks are estimated to fall to 17.8 million bales, down 3 million bales from the previous year. For the 2010 marketing year, stocks are projected to fall to 16.9 million bales, giving a stocks-to-use ratio of 35.2%. Is China comfortable with a stocks situation that’s tighter than any time in recent history?
COTTON “A” INDEX – Cotton prices gained momentum in the latter half of 2009 as the balance sheet tightened due to reduced expectations for 2009 production, the US $ remained weak, and the expectations for demand have improved .
The “A” Index has lost 4 to 5 cents since its early-January peak, but prices are still well above year-ago levels and comparable to prices in the first half of 2008.
STOCKS-TO-USE VS PRICE – One difference between now and then is that the fundamentals of the balance are more supportive of these prices levels. The stocks-to-use ratio is expected to be at 45%, instead of 50 or higher. In 2010/11, our projection of 43% is the lowest since the early 1990’s.
ISSUES TO WATCH – To conclude, there is a long list of issues to keep an eye over the coming, I would like to briefly highlight just a few.
First, what will be total US exports for the ’09 marketing year? There have been two weeks of strong sales. Shipments will pick up as we move into the spring. It is not out of the question to go above our projected total of 11.6 million bales. If so, US stocks fall even further. Also, we normally carry 1 to 1.5 million bales of sales from this year into the next, meaning that a big part of our cotton stocks are already sold. There could be very little “free” cotton.
Second, China and India account for more than half of world production. We expect another 3.7 million bales from those two countries in 2010. Does competition from other crops and weather allow them to achieve that increase? Do they do more than that?
Third, is this economic recovery for real? In developed economies, government actions and stimulus packages started the rebound, but at some point, the consumer has to sustain the recovery?
Finally, for 2010, cotton’s balance sheet remains supportive of prices as world production is projected to fall short of consumption. However, cotton prices will be driven by more than just the cotton balance sheet. In particular, movements in the US $ show a strong inverse relationship with cotton prices over the past 2-3 years. A weaker dollar has supported cotton prices, but at this point, further weakening is not expected in 2010, and more indications suggest a stronger dollar.
NATIONAL COTTON COUNCIL – Any outlook is clouded by risks and uncertainties, and for 2010, that is especially true given the fragile nature of the general economy. But, as I mentioned at the outset of my remarks, NCC economists hold an optimistic view for the year ahead as production and demand continue to recover.
Thank you for your attention this morning. Mr. Chairman, that concludes my report.