Monthly Economic Outlook

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Prepared by:
Economic Services - National Cotton Council
February 2014

TO CONVERT BALES TO METRIC TONS:
number of bales / 4.59

TO CONVERT ACRES TO HECTARES:
number of acres * 0.40469

MACROECONOMIC ENVIRONMENTLet's begin with an overview of the state of the general economy.

U.S. REAL GDP According to the latest estimates released by the Bureau of Economic Analysis, real GDP increased at an annual rate of 4.1 percent in the third quarter of 2013. Estimates from the Bureau of Economic Analysis show an increase of 3.2 percent in the fourth quarter of 2013.

OK-WTX CRUDE OIL SPOT PRICE – Since the beginning of the year, prices have fluctuated between $91.36 and $100.12 per barrel.

#2 DIESEL FUEL RETAIL PRICE – Diesel prices have followed the same trend as that of crude oil prices. The price for #2 diesel fuel in mid-January was just over $2.90 per gallon.

UNEMPLOYMENT RATEThe unemployment rate is 6.6% for January, down slightly from the previous month's unemployment rate.

FEDERAL BUDGET SURPLUSThe latest projections by the Congressional Budget Office (CBO) show deficits continuing for the next several years. For fiscal '13, CBO projects a deficit of roughly $680 billion. Deficits persist through 2020.

CBO AG BASELINE SPENDING Looking at fiscal 2012 through 2015, commodity programs are expected to costs between $6.0 and $7.2 billion per year, with conservation programs adding an additional $4.7 to $5.6 billion per year.  Within commodity support, cotton outlays average about $713 million per year.

WORLD REAL GDP GROWTHThe International Monetary Fund estimates that the world economy grew 3.10% during the course of 2012. China's economy was expected to increase 7.70% in 2012. Estimates for India show GDP growth of 3.20% for 2012. For 2013, the world economy continued to grow only at a slower pace, 3.00%. China's economy was expected to climb 7.70% in 2013 while estimates for India show GDP growth of 4.40%. For 2014, world GDP continues to climb at a rate of 3.70% while the U.S., Indian and Chinese economic sector are expected to continue to grow.

PERCENT CHANGE IN VALUE OF U.S. DOLLAR - In 2013, the euro averaged 0.75 per dollar, which represents a modest appreciation from the 2012 value. The euro's strength in 2013 surprised many analysts, who had expected tough economic conditions in some member states to weigh on the single currency. Currently, the euro is averaging 0.74 per dollar.

EXCHANGE RATE INDEXThe Federal Reserve Board publishes a real exchange rate index comparing the dollar to a weighted average of currencies of important trading partners, excluding major developed economies. Mexico carries the largest weight, followed by China, South Korea and Taiwan. The index showed a dramatic strengthening of the dollar in 1998 due to currency devaluations associated with the Asian financial crisis. In early 2001, the index sat at just under 118. The index peaked at roughly 124 in 2003, but now sits at just under 94.

AG PRICES RECEIVEDThe U.S. Department of Agriculture (USDA) publishes monthly indices of prices received by farmers. The index of crop prices now stands at 186. The index of livestock prices is down from the previous month at 172.

NET FARM INCOMENet farm income is forecast to be $131 billion in 2013, up 15.1 percent from 2012's estimate of $113.8 billion. After adjusting for inflation, 2013's net farm income is expected to be the highest since 1973.

U.S. COTTON SUPPLYHaving set the stage for the overall economy, let's turn our attention to the U.S. cotton sector.

DEC COTTON FUTURES Over the life of each contract, the December 2014 contract has averaged roughly half a cent per pound lower than the December 2013 contract.

DEC CORN FUTURES - Over the life of each contract, the average value of the December 2014 futures contract has been roughly $1.46 per bushel lower than the December 2013 contract.

NOV SOYBEAN FUTURES - Over the life of each contract, the November 2014 soybean contract has averaged roughly $1.57 per bushel lower than the November 2013 contract.

U.S. COTTON ACREAGEU.S. cotton producers intend to plant 11.26 million acres of cotton this spring, up 8.2% from 2013, according to the National Cotton Council's 31st Annual Early Season Planting Intentions Survey. Upland cotton intentions are 11.04 million acres, up 8.1% from 2013, while extra-long staple (ELS) intentions of 225,000 acres represent an 11.8% increase. Beginning with the Southeast, survey results indicate a 1.2% decrease in the region's upland area to 2.63 million acres. In the Mid-South, survey results show that growers intend to plant 1.39 million acres, an increase of 12.5% from the previous year. Growers in the Southwest are indicating an increase of 12.1%, bringing the regional total to 6.74 million acres. In the West region, results are mixed as growers in Arizona and New Mexico intend to plant more acres in 2014, while California will decrease upland acres. For the region as a whole, the survey reports 2014 upland area of 275,000 acres, down 5.8% from 2013. With ELS prices up from year-ago levels, survey results indicate that U.S. cotton growers intend to increase ELS plantings 11.8% to 225,000 acres in 2014.

U.S. COTTON PRODUCTION – In its February report, for 2011, the USDA forecast U.S. production at 15.6 million bales. An increase of roughly 1.8 million bales is projected for the 2012 crop with production climbing to 17.3 million bales.U.S. production is estimated to be 13.2 million bales for 2013/14.

U.S. COTTON SUPPLYIntheFebruary report, USDA estimates production at 15.6 million and beginning stocks of roughly 2.6 million for the 2011 crop year. Combined with imports this gives total supplies of 18.2 million bales for the 2011/12 marketing year.

By adding beginning stocks of 3.4 million bales to the 17.3 million bale crop, USDA believes total U.S. supply will grow roughly 2.5 million bales to 20.7 million bales in 2012.

For the 2013 crop year, combining projected production of 13.2 million bales with expected beginning stocks of 3.9 million bales results in a total U.S. supply of 17.1 million bales. This is down roughly 3.6 million bales from the 2012 level.

U.S. COTTON DEMANDMoving along, we'll focus on U.S. cotton demand.

U.S. RETAIL FIBER CONSUMPTIONNet domestic consumption is a measure of the U.S. retail market's size. It measures both cotton spun in the U.S. (mill use) and cotton consumed through textile imports. Total fiber consumption in 2013 was 46.7 million bale equivalents. Cotton's share of net domestic consumption decreased 0.6% this past year to 37.7%, which translates to 17.6 million bales. For 2014, NCC projects net domestic consumption of all fibers to increase to 48.1 million bales. With a projected share of 37.4%, cotton's net domestic consumption is projected to be 18.0 million bales.

COTTON'S SHARE OF CONSUMPTIONWhile it is important that the retail market continue to grow, cotton must also be concerned with its share of the market and the competition from manmade fibers. During the past few years, cotton's share of the U.S. retail market has been on the decline. In 2002, cotton's share reached just over 43%. The higher prices of 2003 were met with some shifting from cotton to other fibers. As a result, cotton's share of the retail market dipped. However, in 2006 cotton's share of the retail market climbed back up to 43.1%. For 2008, cotton's share of the retail markets reached the 44.0% mark. In 2009, cotton's share had fallen back to just over 43%. This decline continued in 2010 through 2012. Cotton's share of the retail market declined further in 2013 to 37.7%.

U.S. RETAIL COTTON CONSUMPTION (MONTHLY) – The U.S. retail market reached 17.0 million bales of cotton textile products for calendar 2012. The 2013 retail market reached almost 17.6 million bales.

U.S. RETAIL COTTON CONSUMPTION (HISTORICAL) - Imported goods make up the largest portion of U.S. net domestic consumption. In 2010, the amount of imported cotton textiles was greater than U.S. net domestic consumption of cotton textiles for the first time. This indicates that some of the goods were imported into the U.S. and were then re-exported in another form (i.e. yarn imported and then exported as fabric). Imported cotton textiles decreased from 17.8 million bale equivalents in 2011 to 17.1 million in 2012. They increased slightly in 2013 to 17.6 million bale equivalents.

U.S. COTTON TEXTILE IMPORTS - Imports of cotton goods in calendar 2013 increased by 3.3% to 17.6 million bale equivalents. In calendar 2014, NCC projects cotton textile imports to increase to 18.0 million bales.

U.S. COTTON CONTENT - For imports, it is important to consider that a significant portion of imported goods contain U.S. cotton. Since much of what the U.S. exports to the NAFTA (North American Free Trade Agreement) and the CBI (Caribbean Basin Initiative) countries is in the form of fabric and piece goods that come back in the form of finished goods, the trade gap is not as wide as implied by gross imports and exports. NCC analysts estimate that 27.7% of all cotton goods imported in 2013 contained U.S. cotton. This is a 0.7% decrease over the previous year. In bale equivalents, these imported cotton goods contained 4.9 million bales of U.S. cotton. This is due, in large part, to our trading partners in NAFTA and the CBI.

COTTON TEXTILE TRADE WITH MEXICO - Imports from Mexico in 2013 were 1.1 million bales, up approximately 1.6% from the previous year.

COTTON TEXTILE TRADE WITH CBIImported cotton goods from CBI for the year were 2.2 million bale equivalents, down 2.7% from the previous year.

COTTON TEXTILE IMPORTS FROM CHINA- For the ninth consecutive year, China was the largest supplier of cotton textile imports into the U.S. Total cotton product imports from China increased to 5.8 million bale equivalents in 2013, up 4.5% from 2012 and up by over 600% from 2001 when China entered the WTO. China's share of imported cotton goods in the U.S. market accelerated from 10.9% in 2004 to 32.9% in 2013.

CALENDAR MILL USEMill use of cotton increased from the previous year to 3.58 million bales in calendar 2013, 5.7% above 2012. For calendar 2014, NCC forecasts domestic mill use of cotton at 3.69 million bales.

CROP YEAR MILL USEUSDA's latest estimate for mill use in the 2011 crop year is 3.3 million bales. The USDA estimates 2012 crop year mill use at 3.5 million bales. For 2013, USDA projects domestic mill use of cotton at 3.6 million bales.

U.S. COTTON PRODUCTION & USE - Looking at the 2011 crop year, USDA estimates exports at roughly 11.7 million bales while U.S. production is estimated at 15.6 million bales and mill use is estimated to be 3.3 million bales. For 2012, exports, mill use and production are expected to increase. USDA estimates U.S. production to be 17.3 million bales for 2012/13. USDA estimates mill use to be 3.5 million bales while exports are estimated to climb to 13.0 million bales. For 2013, mill use is expected to reach 3.6 million bales, up from the previous year while production and exports are expected to fall.

WORLD MARKET Exports of U.S. cotton will be dependent on conditions in the world market.

CHINA COTTON SUPPLY & USEFor China, production is expected to climb to 34.0 million bales for the 2011 crop year. In terms of consumption, one of the big questions will be the factors driving China's mill use.  Much of the growth has been fueled by the push to increase textile exports, and they will continue to be a significant exporter of textiles.  However, over the past couple of years, it's becoming more evident that growth in their own consumer demand for cotton textiles is also driving the textile industry.  Assuming this trend will continue, mill use is projected to be roughly 38.0 million bales. For 2012, production will climb to 35.0 million bales while mill use falls to 36.0 million bales. For the 2013 crop year, USDA projects production to drop to the 32.0 million bale range while mill use remains unchanged at 36.0 million bales.

WORLD COTTON PRODUCTION - USDA estimates put the 2011 crop at 126.6 million bales and 123.1 million bales for the 2012 crop. USDA estimates for 2013/14 show world production at roughly 116.7 million bales.

WORLD FIBER DEMANDThe competition from man-made fiber is getting stronger all of the time. According to PCI, the use of polyester has surpassed cotton, and for 2010, consumption topped 170 million bales. This is over 55 million bales above their estimate of the consumption of cotton. For 2013, PCI estimates polyester consumption to rise to approximately 212 million bales.

FIBER PRICES – While manmade fiber prices moved higher, cotton prices weakened substantially as we went through 2004. Since 2004, cotton prices have worked their way back to and above the level of manmade fiber prices.

WORLD COTTON MILL USE In its February report, USDA estimates 2011 world mill use at 102.8 million bales and 106.4 million bales for the 2012 crop year. For crop year 2013 mill use is set at roughly 109.5 million bales.

FOREIGN PRODUCTION & USEThe gap between foreign production and use influences our ability to export cotton. The gap narrows between production and consumption in 2011 with production forecast at 111.1 million bales and mill use at 99.5 million bales. For the 2012 crop year, production is estimated at 105.8 million bales and mill use at 102.9 million bales. For the 2013 crop year, production is estimated at 103.5 million bales and mill use at 105.9 million bales.

U.S. COTTON EXPORTS According to USDA, the U.S. will export 11.7 million bales in the 2011 crop year. In 2012, exports climb to 13.0 million bales. For 2013, exports fall to an estimated 10.5 million bale mark.   

WORLD ENDING STOCKS - World stocks on July 31, 2012 are projected to reach 73.3 million bales. While there are a host of uncertainties that can lead to major changes in the balance sheet, not the least of which is weather, the current estimates still leave us with a lot of stocks to work through the system. According to USDA, stocks should be roughly 89.2 million bales by the end of the 2012 marketing year. By the end of the 2013 marketing year, stocks are estimated to climb to 96.5 million bales.

COTTON STOCKS/USEAnother way to look at the stocks situation is to focus on the stocks/use relationship for the world less China. For the 2003 marketing year, that ratio was estimated to be 44%. The larger '04 crop pushed that ratio back up to 60%. The ratio is estimated at 55% for the 2005 marketing year and 57% for 2006. For 2007, the ratio is projected to remain unchanged at 57%. In 2008, the stocks-to-use ratio should be somewhere around 61% and 48% in 2009. For 2010, the stocks-to-use ratio is estimated to climb to 58%. For the 2011 marketing year, the ratio is expected to climb to 65% and falls to 55% in the 2012 marketing year and is expected to remain at 53% through the 2013 marketing year.

U.S. SUPPLY & DEMANDIn its February report, USDA gauged U.S. 2012/13 cotton production at 17.3 million bales. Mill use was estimated at 3.5 million bales and exports were estimated to be 13.0 million bales. The estimated total offtake now stands at 16.5 million bales generating ending stocks of 3.9 million bales and a stocks-to-use ratio of 23.6%.

U.S. production is estimated to be 13.2 million bales for 2013/14. Mill use is estimated at 3.6 million bales while exports are reported to be 10.5 million bales. The estimated total offtake stands at 14.1 million bales. With beginning stocks of roughly 3.9 million bales, this would result in U.S. ending stocks of 3.0 million bales on July 31, 2014, and a stocks-to-use ratio of 21.3%.

WORLD SUPPLY & DEMANDIn USDA's February report, world production for the 2012/13 marketing year was estimated to be 123.1 million bales. World mill use was estimated at 106.4 million bales. Consequently, world ending stocks are estimated to be 89.2 million bales with a stocks-to-use ratio of 83.8%.

World production is estimated at 116.7 million bales for the 2013/14 crop year. Mill use is set at roughly 109.5 million bales. With beginning stocks of 89.2 million bales, this would result in world ending stocks of roughly 96.5 million bales on July 31, 2014, and a stocks-to-use ratio of 88.1%.