2009 Cotton Economic Outlook
NCC Annual Meeting
Washington, DC
February 12-16, 2009
INTRODUCTION – Good morning. Thank you, Mr. Chairman, for the opportunity to present the Council’s economic outlook for U.S. and world cotton. As 2009 begins, the U.S. cotton industry is facing a host of economic challenges. With this economic outlook report, NCC economists hope to provide information and analyses that will equip the industry to meet these challenges.
GENERAL ECONOMY – Cotton’s economic outlook is extremely dependent on the underlying macroeconomic assumptions. As I was preparing this year’s comments, I looked back at last year’s report, which is a dangerous thing to do because it reminds you of how wrong you’ve been. Nonetheless, the following statement caught my attention – “The general economy is dominating the headlines as pessimism over 2008 economic performance grows.” Here we are a year later, and replace 2008 with 2009, and the statement still holds true.
REAL GDP GROWTH – Let’s begin with an overview of expectations for the general economy. According to the latest projections by the International Monetary Fund (IMF), world growth is projected to fall to ½ percent in 2009, its lowest rate since World War II. Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy.
A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged.
Advanced, or developed, economies are expected to contract by 2 percent in 2009. Growth in developing countries will slow to just over 3 percent. The continuation of the financial crisis, as policies failed to dispel uncertainty, has caused asset values to fall sharply across advanced and emerging economies, decreasing household wealth and thereby putting downward pressure on consumer demand.
Helped by continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent.
W TEXAS CRUDE OIL PRICE – An outcome of the sharply weaker demand has been substantially lower commodity prices. The West Texas Intermediate crude oil price averaged more than $130 per barrel for June and July before ending the year at $40. The worsening global economy and a weak oil consumption outlook have been more than enough to keep pressure on prices despite two downward revisions in production targets by the Organization of the Petroleum Exporting Countries (OPEC).
The latest projections by the Department of Energy suggest oil prices remain near current levels through 2009 with some strengthening through 2010. The path largely reflects their assumptions that the economy and demand begin to recover in the latter part of 2009 and recovery continues into 2010.
One of the positives in the current outlook is relief in production costs relative to 2008 – which was the most expensive crop to produce given the prevailing fuel and fertilizer prices. For 2009, costs of purchased inputs could range from $50 to $100 per acre lower, depending on specific production practices.
US $ VS COTTON IMPORTERS – In recent months, there has been a strong correlation between the strength of the dollar and commodity prices, in general, and cotton prices, in particular. During periods of market uncertainty, traders sell currencies that are perceived riskier and place their bets in safe havens. As a result, the US dollar enjoyed a broad based rally in mid-2008 reversing a four year declining trend against many currencies.
For importing countries, a stronger dollar makes commodities relatively more expensive in their national currency. This has been the case for some of our largest customers, with the exception of China, whose currency appreciated in the first half of 2008 before stabilizing in the second half of the year. In Mexico, Turkey, and Indonesia, the dollar strengthened between 20 and 40 percent. Similar patterns have held against selected competitors.
US UNEMPLOYMENT – The U.S. job force steadily contracted over the last year as businesses reacted to economic uncertainty and declining revenue. The Bureau of Labor Statistics now puts January’s unemployment rate at 7.6 percent – the highest since summer 1992.
Recent announcements suggest that companies are still assessing the full impact of the economic crisis and further job losses are expected. Current projections expect unemployment to top out later this year or in the first half of 2010 at rates between 8.5 and 10 percent – which compares to the employment situation in the early 1980’s.
US FEDERAL BUDGET SURPLUS – Ongoing turmoil in the housing and financial markets has taken a major toll on the federal budget this year. The Congressional Budget Office (CBO) estimates that total federal revenues will fall, primarily due to lower individual and corporate income taxes.
At the same time, efforts to combat the faltering economy have led to sharply higher outlays. Unemployment compensation is projected to nearly double; outlays for nutrition assistance are expected to expand; and CBO projects that federal spending for the three largest mandatory programs - Social Security, Medicare and Medicaid are all anticipated to record growth of at least 8% this year.
The result is a deficit for fiscal year 2009 of $1.2 trillion, more than two and a half times the size of 2008. However, their recent estimates of the stimulus package add more than $700 billion to the deficit over the next three fiscal years.
INTERNATIONAL COTTON OUTLOOK – As we turn our attention to the cotton market, let’s start with an overview of key international markets and the overall trade picture.
CHINA COTTON SUPPLY & USE – China remains a wildcard in the current outlook. After a decade of sustained growth in mill use, it is apparent that their cotton use will contract in the 2008 marketing year. A slow-down in global textile demand, tighter credit conditions, and until recently, a strengthening currency contributed to the current estimate of 46.3 million bales for the ’08 marketing year. A downturn in their mill use, coupled with production of 36.5 million bales has reduced their expected net imports to 6.7 million bales – down from 11.5 last year.
The outlook for the coming year depends, in part, on how some of the policy changes play out. For example, in an effort to support slumping seed cotton prices, China announced their intentions to procure for their state reserves as much as 12.5 million bales of 2008 production. As a result, China is estimated to end the 2008 marketing year with 19.4 million bales of cotton stocks, with the vast majority in government reserves. If the Chinese government decides to aggressively liquidate those reserves in the coming months, it could dramatically alter their import requirements.
In addition, there are efforts underway to support the struggling textile industry. Increases in the export tax rebate and inclusion in packages designed to stimulate their economy have the potential to boost demand. For the 2009 marketing year, we expect a slight recovery to 47.2 million bales.
With lower seed cotton prices and need to boost food crop production, it is becoming more apparent that 2009 cotton production will decline. While some surveys have suggested a 20% reduction, we’re taking a more conservative view of the decline and expect a crop of 32.6 million bales – as compared to 36.5 in 2008.
The net effect of these adjustments is a recovery in imports for the 2009 marketing year with net imports of 9.6 million bales. Again, this is contingent on their stocks policy. We do expect the stocks to decline in 2009.
INDIA COTTON SUPPLY & USE – India is another country whose recent policy change is affecting the current outlook. Last year, the Indian government announced an increase in cotton’s Minimum Support Price of 35 to 40%. On a lint basis and at current exchange rates, the increase gives a support price close to 70 cents per pound. However, as market prices declined, the Indian government became the home for much of their production. With support levels above current market prices, the Indian government has authorization to purchase up to 11.7 million 480 lb. bale equivalents.
While there is an ongoing debate between the various segments of India’s cotton industry as to the appropriateness of the higher support price, this outlook assumes that support is maintained for 2009. India’s export prospects are complicated by the current support price. For the current marketing year, net exports are an estimated 3.5 million bales – down 3 million from the previous year.
Current reports indicate that cotton is being sold from their stocks to Indian mills. A decision to be more aggressive with stock release into export channels could boost their presence in the world market, but at current prices, would carry a high cost to the government.
With the higher support price, production in India is generally expected to be maintained near current levels. With only a slight recovery in mill use, India could return to the world market as a more significant exporter. For 2009, we project their exports will recover to 6.5 million bales.
SELECTED COUNTRIES – Time does not allow us to go through all countries in great detail, but instead, I’ll touch on a few countries. After China, Mexico, Turkey and Indonesia are the next three largest international buyers of US cotton.
Mexico’s net imports of between 1.1 and 1.2 million bales is the lowest since the 1996 marketing year. Their textile industry is struggling from some of the same pressures we see in the US – soft demand in the current economy and competition from imported Asian products. For 2009, the overall trade picture remains stable as both production and mill use are expected to decline.
Turkey’s net imports of 2.3 million bales have also moderated relative to recent years as a sharp reduction in mill use has more than offset the decline in production. For 2009, we expect a further shift of acres away from cotton and to competing crops – resulting in smaller cotton production. This is expected to more than offset the slight reduction in 2009 mill use. As a result, an improved situation is expected in Turkey.
Indonesia relies on imported cotton to supply virtually all of their needs. With an estimated decline in 2008 mill use, their import needs are also lower at 2.1 million bales. For 2009, both mill use and imports are expected to show a modest recovery. A projected weaker currency will boost their competitiveness in world textile trade.
In West Africa, unattractive prices and limited credit is expected to result in lower production and exports for 2009. Continued competition from soybeans will reduce Brazil’s presence in the world market. For Australia, a recovery in exports is related more to improved moisture levels rather than a price-induced increase in production.
INTERNATIONAL COTTON SUPPLY & USE – When aggregating the countries and regions outside of the US, international production for 2008 totals 96.8 million bales. For historical perspective, the 2008 crop is down approximately 4 million bales from the record of 101.3 in 2007. For 2009, international production is projected to fall to 92.9 million bales – which would be smallest crop since 2005.
Mill use for 2008 is estimated at 108.3 million bales, down from 118 in 2007. Given the expected improvement in the general economy by 2010 and policy efforts to bolster mill use in countries such as China, an increase to 109.9 is projected for the 2009 marketing year. The balance sheet for international cotton continues to carry a ‘Loss’ term of -2.5 million bales, which is consistent with USDA’s current balance sheet.
However with the smaller crop, availability of cotton is not a huge concern because of the almost 55 million bales of stocks held outside of the United States. It is anticipated that some of those stocks will be drawn from as the 2009 marketing year progresses, with China and India accounting for much of the adjustment.
The net result on U.S. trade is aggregate net imports of 11.5 million bales in the current year, falling to 11.2 million bales in the coming year.
US COTTON EXPORTS – To be clear, the net imports outside of the United States equate to net exports from the US. The 11.5 million bales in the current year are comprised of 11,125,000 bales of upland cotton and 375,000 bales of ELS. For 2009, exports of approximately 10.8 million bales of upland and 400 thousand bales of ELS give the 11.2 million bale total.
For 2008, the US accounts for 38 percent of world exports, with the trade share dropping to 33 percent in 2009. India is expected to increase trade share in 2009.
US COTTON MARKET – To complete the balance sheet for US cotton, let’s begin with US mill use.
US MILL USE – Heading into 2009, the US textile industry remains under pressure from a combination of factors. Retail purchases declined in 2008 and will likely fall further in 2009. In addition, the limits on imports from China in 34 textile categories expired at the end of 2008. On a positive note, the much-needed economic assistance included in the 2008 Farm Bill has been implemented and textile mills are submitting the necessary documentation to receive 4 cents per pound on their cotton consumption.
US COTTON RETAIL USE – As I mentioned earlier, the apparent retail market in the US declined to 21.8 million bales, down from 23.5 in calendar 2007. It is important to understand that this estimate of the retail market is derived based on US mill use and net textile trade. That is why it’s important to think of it as apparent use because inventory adjustments within the textile supply chain are also captured in this number. In other words, the actual decline in purchases may not have been as large if textile inventories were depleted. Consumer expenditure data show a flat retail market in 2008.
In 2008, imports of textile products also declined as retailers and consumers adjusted to the current economic climate. Imports of 21.6 million bale equivalents are down from 22.8 million in 2007.
For calendar 2009, another small decline in apparent consumption is estimated, as well as a decline in imports. However, it is also worth noting that total imports are slightly larger than apparent use. That situation arises because some of the yarn, thread and fabric imported into the US are then exported as a semi-finished textile product.
US TEXTILE IMPORTS – In 2005, the US and China signed an agreement limiting Chinese textile imports in 34 textile and apparel categories from January 1, 2006 until December 31, 2008. The 34 categories represent about one-third of total imports into the US.
In agreement categories, the quotas have limited China’s market share to 14 percent. In contrast, China’s market share in the non-agreement categories in 2008 was 55 percent. Relative to the agreement categories, the aggregate country groupings of Western Hemisphere, Other Asia, and Rest-of-World each lost share to China in the non-agreement categories. The largest decline was in the Western hemisphere countries as their market share fell from 29 percent to 9 percent in the two categories.
It is difficult to quantify precisely how much US textile imports from China will increase due to the expiration of the US-China textile agreement. The loss of the quotas included in the agreement is coming at a time when the US is experiencing a large downturn in our retail market due to the recession. However, based on what we’ve observed in the non-agreement categories and the experience of the European Union, who had a similar agreement that expired at the end of 2007, China will expand market share in those categories, and likely at the expense of the US and Western Hemisphere textile industries.
At the request of Representative Rangel, the US began monitoring certain US textile and apparel imports from China. His request was designed to help prevent a repeat of the disruptive surge of Chinese textile and apparel exports to the U.S. following the discontinuation of quotas in January 2005. The reports will be released biweekly by the ITC.
US COTTON MILL USE – The net result of the current environment on US mill use is for contractions to continue into 2009. For the 2008 marketing year, NCC estimates that US mills will consume 4.1 million bales, down from 4.6 million in 2007. A more modest decline is expected in 2009 with total mill use projected at 3.9 million bales.
2009 US PLANTING INTENTIONS – That brings us to US supply estimates. As you heard from Dale Cougot in yesterday’s meeting of the American Cotton Producers, NCC’s annual survey of planting intentions put this year’s acreage at 8.1 million acres, roughly 14% below the ’08 level.
For upland cotton, there are decreases in all regions with the West and Mid-South showing the largest declines in percentage terms, with 31% and 23%, respectively. The Southeast indicates a reduction of 18% while the Southwest responded with 9% fewer acres. Respondents in the Southeast and Mid-South generally intend to plant more soybeans at the expense of cotton. In the West, concerns over water and competition from specialty crops are causing the decline. The survey of ELS producers calls for a 19% decline.
US COTTON PRODUCTION – Ultimately, weather will be the primary determinant of overall production. Applying an average abandonment rate of 9.4% and assuming yields in line with recent trends gives an all-cotton crop just under 12.8 million bales, with 12.4 million bales being upland and 372 thousand bales of ELS. This is approximately 250 thousand bales below 2008.
For cottonseed production, an average seed-to-lint ratio gives a crop of 4.4 million tons. If competing feed prices remain strong, tight cottonseed supplies would suggest that there’s little if anything that would call for lower cottonseed prices in 2009.
US COTTON SUPPLY & USE – At the beginning of the 2008 marketing year, the US balance sheet carried 10 million bales from the preceding year. Combined mill use and exports are estimated to reduce stocks to 7.5 million bales.
Despite smaller disappearance in 2009, combined mill use and exports will exceed the anticipated crop, further reducing stocks to 5.2 million bales.
SUMMARY –US cotton’s economic situation will continue to be heavily influenced by developments in the world market. A reduction in US stocks may have little bearing on prices if world stocks remain high.
WORLD COTTON SUPPLY & USE – For the world balance sheet, much of the focus continues to be on global mill use. For the current marketing year, NCC estimates world mill use at 112.4 million bales, which only slightly below USDA’s latest estimate. Relative to 2007, this represents an 8.4 percent reduction, which is an unusually large year-on-year decline. In fact, our historical data suggest this was the largest decline since 1941. Clearly, the downturn in mill use is in response to the current economic and financial situation. But, I’ll also mention that it’s difficult to determine how much is a real cut-back in consumer purchases versus adjustments in the textile pipeline.
Global stocks for 2008 change little from the beginning of the year.
For 2009, global production is expected to decline by 4.3 million bales, and at 105.5 million bales, is the smallest crop since 2003. Given the underlying macroeconomic projections, our view is that mill use will recover in the 2009 marketing year to 113.8 million bales. The combined impact of smaller production and increased use allows stocks to decline to 56.3 million bales, from 62.2 million in 2008.
WORLD STOCKS/USE & A INDEX – A comparison of the Stocks-to-Use relationship with Cotton Outlook’s A Index shows the expected inverse relationship. For the current marketing year, the A Index is expected to average approximately 60 cents per pound, while lower mill use pushes the Stocks-to-Use ratio to 55 percent. For the 2009 marketing year, the Stocks-to-Use ratio dips below 50 percent for the first time in 5 years, and painting a scenario more supportive of prices going into 2010.
RECAP – To briefly recap the current outlook, the 2008 marketing year can be remembered as one of uncommon outcomes. The intricate linkages between the cotton market, other commodity markets, and the general economy have never been more evident.
Who would have expected the December contract to trade in the lower 90’s and the upper 30’s in a span of 8 months? Pessimism over faltering demand and reduced trade is overriding lower production and contributing to the weaker price situation. The resulting combination of lower production, use, and price is an uncommon occurrence, with only one previous instance during the last three decades. Perhaps, not surprisingly, that prior time was the 1998 marketing year. Similar to the current environment, financial turmoil, at the time in the form of the Asian currency devaluations, played a large role in all commodity markets.
Looking ahead to 2009, there are opportunities facing the industry. Reductions in cotton production will be evident in more countries than observed in previous years. Also, use is expected to recover as economic performance rebounds, allowing stocks to decline. However, there are the uncertainties around the estimates – primarily stemming from the dependency of these projections on overall economic performance and the impacts of policy changes, such as efforts to bolster textile manufacturers or stock management decisions.
NATIONAL COTTON COUNCIL – In closing, I hope this outlook provides an overview of some of the challenges and opportunities that we face in a very competitive and difficult economic climate.
Mr. Chairman, that concludes my report. Copies of the outlook are available at the close of this session, and the presentation is available on the Council’s website. Thank you.