Annual Economic Outlook for Cotton

2017 Cotton Economic Outlook
NCC Annual Meeting
Dallas, TX

February 10-12, 2017

Introduction
Good morning. Thank you for the opportunity to present the National Cotton Council’s economic outlook for U.S. and international cotton markets. While the presentation will focus on a few highlights, the full report will be available at the end of this session.

2016: Year in Review
Over the course of 2016, cotton futures experienced significant fluctuations. After reaching a seven-year low in March, cotton futures climbed to a two-year high in August before retreating back to 65 cents a few weeks later. For the remainder of the year, cotton futures traded in the 66 to 73 cent range.

While cotton and soybean prices trended upward, grain prices declined in 2016. Oil prices increased from the lows observed in 2015. World cotton production increased by 9.3% while the latest USDA estimate shows a 1% increase in consumption. However, ending stocks were reduced for the second year in a row due to increased Chinese reserve sales.

U.S. Balance Sheet
To recap the current 2016 marketing year, USDA’s most recent estimate puts last year’s harvest at 17 million bales, up 4 million bales from 2015.

According to the latest USDA estimate, U.S. producers planted 10.1 million acres of cotton in 2016, an increase of over 17% from the previous spring. Increases were observed in all regions except the Southeast. The increased acres were primarily the result of higher cotton prices relative to grains and oilseeds, more favorable planting conditions in the Southwest, and increased water availability in the West.

The USDA estimate for U.S. mill use in 2016 is 3.3 million bales, down 150 thousand bales from 2015. The current estimate is in line with recent monthly consumption numbers.

NCC is projecting exports of 12.8 million bales due to current YTD sales. U.S. exports are estimated to be 39.3% higher in 2016. If the current pace of sales and shipments is maintained, the strong demand for high quality cotton could push the U.S. export number even higher than 12.8 million bales. The current U.S. export estimate breaks down into 12.2 million bales of upland cotton and 600 thousand bales of ELS cotton. The U.S. will remain the largest exporter of cotton with a market share of 35.8% as compared to 26.0% in 2015.

NCC Acreage Survey
With that review in mind, the projections for the 2017 marketing year will begin with the outlook for U.S. production. As in past years, the prospects for the U.S. crop are based on the results of the NCC planting intentions survey with assumptions made for abandonment and yields.

Surveys were distributed on December 15 and responses were collected through mid-January. Respondents are asked to give their plantings of cotton, corn, soybeans, wheat, and other crops for 2016 and intended acreage for 2017.

Pre-Planting Market Signals
As always, the survey results should be viewed as a measure of grower intentions prevailing at the time the survey was conducted. During the survey period, the cotton December futures contract averaged 70 cents per pound, which is higher than year-ago levels. Looking at competing crops, corn prices were lower than year-ago levels while soybean prices were about 12% higher. The price ratio of cotton to corn is more favorable than in 2016.

It is important to call attention to the ratios because past experience has shown that these ratios are reliable indicators of changes in cotton acreage. Historical data over the past 10 years shows a clear relationship between the price ratios and changes in cotton acreage. A review of the Council’s survey will begin with a look at the Southeast.

2017 Southeast Acreage
In the Southeast, survey results indicate a 0.1% increase in the region’s upland area to 2.2 million acres. Across the six states, the results are mixed with increased acreage in Alabama and Florida and a decrease for the other four states.

In Alabama, the survey responses indicate 14.2% more cotton acreage and less corn and wheat area. In Florida, respondents indicated more cotton and less soybeans.

In Georgia, cotton acreage is expected to decline by 3.1% with ‘Other Crops’, likely peanuts, pulling acres from cotton, corn and wheat. In South Carolina, acreage is expected to decline by 0.4% as cotton acres shift to soybeans and ‘Other Crops’.

In North Carolina, a 4.8% decline is expected as cotton acreage shifts to soybeans and ‘Other Crops’. Cotton acreage is expected to decline by 1.0% in Virginia as acreage shifts to corn and ‘Other Crops’.

Overall, across the Southeast, the states that had more issues with harvest in the past 2 years, including yield and quality losses, along with increased financial pressures, are showing the greatest reduction in cotton acres for 2017.

2017 Mid-South Acreage
In the Mid-South, growers have demonstrated their ability to adjust acreage based on market signals, in particular, the relative prices of competing crops. This year’s survey results are no different with growers intending to plant 1.7 million acres, an increase of 12.8% from the previous year.

Across the region, all states are expected to increase cotton acreage, while decreasing corn and ‘Other Crops’. The largest increase was reported in Mississippi with 26.8% more cotton acreage in 2017. Mississippi respondents expect to lower acreage of all other crops as more cotton acreage is planted.

In Tennessee, cotton acreage is expected to increase by 16.6% as land shifts away from corn. In all states except Mississippi, soybean acreage is expected to increase. In Arkansas and Missouri, corn, wheat, and ‘Other Crops’ are expected to decline. In Louisiana, respondents indicated more cotton, soybeans, and wheat and less corn and ‘Other Crops’.

2017 Southwest Acreage
Growers in the Southwest intend to plant 6.6 million acres of cotton, an increase of 10.7%. Increases in cotton area are expected in each of the three states. In Kansas, land is shifting away from wheat, corn, and soybeans. In Oklahoma, a 30.1% increase is expected as wheat acreage declines.

Overall, Texas acreage is expected to increase by 9.5%. In south Texas, respondents indicate an 11.4% increase in cotton acreage as land shifts away from corn and wheat. Respondents in South Texas also indicated an increase in ‘Other Crops’.

Respondents from the Blacklands indicate a slight decrease in cotton and corn acreage and an increase in wheat and ‘Other Crops’. In west Texas, respondents indicated a 9.6% increase in cotton acreage and a decline in corn, wheat, and ‘Other Crops’.

2017 West Acreage
With intentions of 268 thousand acres, producers in the West are expecting to plant 15.1% more acres of upland cotton. Arizona is responsible for the large increase, with California acreage down slightly and New Mexico acreage up slightly. The survey results for Arizona suggest a shift from corn and ‘Other Crops’ to cotton.

2017 ELS Acreage
The survey indicates that growers intend to plant more ELS cotton in 2017, in some cases due to expectations of increased water allocations. Arizona growers are expecting to plant 79.6% more ELS cotton while California growers expect a 31.4% increase in ELS acres. Overall, U.S. cotton growers intend to increase ELS plantings 36.9% to 266 thousand acres in 2017.

U.S. Cotton Production
Summing across the 4 regions gives intended 2017 upland cotton area of 10.8 million acres, 8.8% above 2016.

Summing together the upland and ELS cotton intentions shows U.S. all-cotton plantings in 2017 of 11 million acres, 9.4% higher than in 2016.

Once again, it is important to remember that the survey is a snapshot in time based on grower intentions. Changes in markets and weather will cause actual plantings to differ from early-season intentions.

Planted acreage is just one of the factors that will determine supplies of cotton and cottonseed. Ultimately, weather, insect pressures, and agronomic conditions play a significant role in determining crop size.

Since the NCC economic outlook does not attempt to forecast weather patterns, the standard convention is to assume yields in line with recent trends and abandonment consistent with historical averages. However, it is important to remember the volatility around estimated production given the uncertainty of weather patterns.

With abandonment assumed at 12% for the U.S., Cotton Belt harvested area totals 9.7 million acres. Using an average 2017 U.S. yield of 830 pounds generates a cotton crop of 16.8 million bales, with 16 million bales of upland and 760 thousand bales of ELS. The projected crop represents a 195 thousand bale decrease from the latest 2016 estimate.

U.S. Balance Sheet
Returning to the U.S. balance sheet, we can turn our attention to the prospects for U.S. cotton demand. First, let’s look at cotton consumed by U.S. mills. A slight increase in consumption by the domestic textile industry is projected in the 2017 marketing year. U.S. mill use is projected to grow by 100 thousand bales, bringing the total to 3.4 million bales. U.S. exports are projected to be 12.4 million bales for 2017. When exports are added to U.S. mill use, total offtake is 15.8 million bales. Recall that the U.S. crop is estimated at 16.8 million bales, thus leading to an increase in ending stocks of 898 thousand bales.

U.S. Exports
Export markets continue to be the primary outlet for U.S. raw fiber production. From 2013-15, the shift in U.S. export customers, including the large reduction in exports to China, was the main story. As we look at the current marketing year, exports to China have stabilized a bit, but a further shift in customers has occurred. While we are only halfway through the 2016 marketing year, it is important to review current export customers given the large increase in projected exports for this marketing year.

As compared to this same time in the last marketing year, exports to all countries have increased, with the exception of Turkey. In most of the countries listed here, 2016 YTD exports are already higher than total 2015 exports. Large increases occurred in Pakistan, China, Indonesia, and India. While world trade increased slightly in 2016, the gain in U.S. market share is largely attributed to supply issues in other major cotton exporting countries. Brazil is projected to have a 33% reduction in cotton exports in 2016, while India’s exports are projected to be 24% lower. In addition, exportable supplies are limited in Central Asia and West Africa for the current marketing year.

China’s Balance Sheet
China announced a new plan in 2016 to auction off cotton reserve stocks each year. In 2016, the reserve auctions took place from May through September and almost 12 million bales were sold. China plans to gradually reduce stocks each year until the reserves reach what they consider a ‘reasonable level’. The 2017 reserve auctions are scheduled to occur from March 6 to August 31.  For the 2016 crop year, the January USDA estimate includes a reduction of 9.9 million bales. In 2017, an additional 10.8 million bale reduction in total stocks is expected. The 2017 estimate assumes that the next auction series will be as successful as in the previous year.

Although world mill use showed only a slight increase in 2016, cotton mill use in China is again showing signs of growth, but competition from lower-priced man-made fiber remains a limiting factor for the growth of cotton fiber use. China is not expected to increases imports until the reserves are further reduced, which could be in 2018/19. China has been reducing acreage and production for the past five years and is not expected to return to previous production levels.

It is important to mention that while China has made some adjustments to cotton production and raw fiber imports, they still remain an important player in the world cotton industry.

China Yarn Imports
While China’s increased consumption of reserve stocks has bolstered mill use in 2016, it has also curbed China’s demand for imported cotton fiber and cotton yarn. This trend could continue as China continues to work through the reserve stocks. China lowered yarn imports from India and Pakistan by 40% and 28%, respectively, but increased imports from Vietnam by 25%.

Ratio of China Yarn Imports to Mill Use
Although U.S. exports to China have been lower in the last few years, exports to Vietnam have significantly increased. Much of the growth in Vietnam’s textile industry has been driven by Chinese and other foreign investment. In Vietnam, the ratio of China yarn exports to domestic mill use has been steadily increasing. Although China is not importing as much raw cotton fiber from the U.S., they are still consuming a significant amount of U.S. cotton.

China Cotton Balance Sheet
This slide shows the breakdown of cotton supply to meet China’s mill use. In 2013/14, production and imports were higher and stocks increased. In 2014/15, production, imports, and stocks declined. Starting in 2015/16, a new lower level of production is coupled with smaller imports and increased reserve sales to meet mill demand. A successful auction series over the next two years could easily put China in a position to become a larger cotton importer again. A reduction in reserves will lead to a gap that will need to be filled by imports, since China has indicated that acreage is not expected to increase back to previous levels.

World Balance Sheet
For the world balance sheet, global production of 105.6 million bales is just slightly higher than in 2016. World mill use is projected to increase to 113.4 million bales, exceeding production by 7.8 million bales. Although cotton’s share of world fiber demand has been declining, total cotton consumption has been trending upward for the past 5 years, with the exception of a slight decline in 2015.

World cotton stocks decline by 7.7 million bales in the 2017 balance sheet. While projections of global consumption exceeding production would normally be supportive of prices, the implications for the coming year may not be as clear cut. The majority of the decline in global stocks is due to reduced inventories in China. Stocks outside of China – an important barometer of price conditions – are projected to increase by 3.0 million bales.

World Cotton Trade
As the net effects of the trade adjustments are aggregated together, world cotton trade for 2017 is estimated at 36.7 million bales, up 1.0 million bales from 2016. The United States is expected to capture approximately 33.7% of world trade by exporting 12.4 million bales in the upcoming year. However, it is important to note that the U.S. projections are highly contingent on the global cotton market.

Cotton Prices
While the Council’s economic outlook does not attempt to project cotton prices, it is important to review some of the factors shaping the current price situation. Cotton prices have maintained a stronger appearance despite sluggish world demand, smaller imports by China, weakness in other commodity markets, and a stronger dollar. In the face of bearish indicators, a lack of exportable supplies in Central Asia and West Africa, coupled with India’s reduced exports, are supporting current prices. In addition, unfixed on-call sales are also providing support to futures prices. 

For the past three years, U.S. cotton producers have struggled with low cotton prices and high production costs. While current futures markets have increased since last year, many producers will continue to face difficult economic conditions in 2017. Production costs remain high and the slightly higher price is still not enough to cover all production expenses for many producers.

Final Thoughts
The U.S. export pace will be a key factor to monitor during the remainder of the 2016 marketing year.

The increased stocks outside of China may contribute to a more bearish tone. As with any projections, there are always uncertainties and assumptions that can dramatically change the balance sheet. China’s stocks and import policy, as well as India’s ability to reenter the export market, provide significant uncertainty for global markets. In addition, a struggling global economy and competition from man-made fibers underscore the challenging landscape facing cotton demand. 2017 is shaping up to be another challenging year for the U.S. cotton industry. Council economists hope this outlook can provide insights to help the industry address those challenges.

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