MACROECONOMIC ENVIRONMENT – Let'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 2.6 percent in the fourth quarter of 2013. Estimates from the Bureau of Economic Analysis show a decrease of 2.9 percent in the first quarter of 2014.
OK-WTX CRUDE OIL SPOT PRICE – Since the beginning of the year, prices have fluctuated between $91.36 and $107.95 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-July was just over $2.80 per gallon.
UNEMPLOYMENT RATE – The unemployment rate is 6.1% for June, down slightly from the previous month's unemployment rate.
FEDERAL BUDGET SURPLUS – The latest projections by the Congressional Budget Office (CBO) show deficits continuing for the next several years. For fiscal '14, CBO projects a deficit of roughly $492 billion. Deficits persist through 2020.
CBO AG BASELINE SPENDING – Looking at fiscal 2014 through 2016, commodity programs are expected to costs between $2.4 and $8.8 billion per year, with conservation programs adding an additional $5.0 to $5.4 billion per year. Within commodity support, cotton outlays average about $577 million per year.
WORLD REAL GDP GROWTH –The International Monetary Fund estimates that the world economy grew 3.20% during the course of 2012. China's economy was expected to increase 7.70% in 2012. Estimates for India show GDP growth of 4.70% 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 3.60% 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 INDEX – The 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 roughly 94.
AG PRICES RECEIVED – The U.S. Department of Agriculture (USDA) publishes indices of prices received by farmers. At the beginning of 2014, the index of crop prices was 186. The index of livestock prices was down to 172.
NET FARM INCOME – Net farm income is forecast to be $95.8 billion in 2014, down 26.6 percent from 2013's forecast of $130.5 billion. The 2014 forecast would be the lowest since 2010, but would remain $8 billion above the previous 10-year average. After adjusting for inflation, 2013's net farm income is expected to be the highest since 1973. In comparison, the 2014 net farm income forecast would be the seventh highest.
U.S. COTTON SUPPLY – Having 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 contracthas averaged over three cents 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 $1.15 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 $1.15 per bushel lower than the November 2013 contract.
U.S. COTTON ACREAGE – In its June acreage report, USDA estimated 2014-15 U.S. cotton plantings at 11.37 million acres, up 9.2% from 2013. Upland planted area is estimated to have increased 9.7% to 11.19 million acres. ELS cotton producers planted 178,000 acres, down 11.4%. USDA's June projection is up 268,000 acres from their initial 2014 estimate released in March.
On a regional basis, upland area in the Southeast is up 3.6% to 2.76 million acres. Only Floridasaw a decline in plantings with producers expected to plant 115,000 acres, down 12.2%. All remaining states will see an increase of 1.0% or greater. The largest percentage increase is expected to take place in Virginia, up 12.8% to 88,000 acres, followed by Georgia (5.8%), Alabama(2.7%) and South Carolina(2.7%).
Planted acres are expected to increase throughout most of the Mid-South. The greatest gains are expected for Louisiana (53.8%) and Mississippi(37.9%) followed by Arkansas(16.1%). Tennessee is expected to plant 250,000 acres, unchanged from last year while Missouri will drop slightly to 250,000, down 2.0% from 2013.
In the Southwest, estimated upland area is up 12.0% to 6.73 million acres. USDA estimates that the largest percentage increase will occur in Kansas, up 59.3% to 43,000 acres. The largest increase in actual cotton acres will occur in Texas, up 650,000 acres (11.2%) from the previous year. Oklahoma climbs roughly 30.0% to 240,000 acres.
Estimated upland area in the West is down 19.5% to 235,000 acres. Producers in Californiaare estimated to decrease plantings 30.1% to 65,000 acres while New Mexicois expected to fall to 30,000 acres (-23.1%). Plantings in Arizonaare down an estimated 12.5% to 140,000 acres.
USDA estimates ELS plantings of 178,000 acres, down 11.4% from 2013. ELS acres are down in California19.8% to 150,000 acres. Only Arizonaand Texasare expected to grow more than 10,000 acres of ELS cotton with estimates of 10,000 and 13,000 acres, respectively.
U.S. COTTON PRODUCTION – In its July report, for 2012, the USDA forecast U.S. production at 17.3 million bales. A decline of roughly 4.4 million bales is projected for the 2013 crop with production falling to 12.9 million bales. U.S. production is estimated to be 16.5 million bales for 2014/15.
U.S. COTTON SUPPLY – IntheJulyreport, USDA estimates production at 17.3 million and beginning stocks of roughly 3.4 million for the 2012 crop year. Combined with imports this gives total supplies of 20.7 million bales for the 2012/13 marketing year.
By adding beginning stocks of 3.9 million bales to the 12.9 million bale crop, USDA believes total U.S. supply will fall roughly 3.9 million bales to 16.8 million bales in 2013.
For the 2014 crop year, combining projected production of 16.5 million bales with expected beginning stocks of 2.7 million bales results in a total U.S. supply of 19.2 million bales. This is up roughly 2.4 million bales from the 2013 level.
U.S. COTTON DEMAND – Moving along, we'll focus on U.S. cotton demand.
U.S. RETAIL FIBER CONSUMPTION –Net 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 CONSUMPTION – While 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 17.6 million bales of cotton textile products for calendar 2013. Data through May show us running slightly behind last year's pace by approximately 133,000 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 CBI – Imported 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 USE –Mill 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 USE – USDA's latest estimate for mill use in the 2012 crop year is 3.5 million bales. The USDA estimates 2013 crop year mill use at 3.6 million bales. For 2014, USDA projects domestic mill use of cotton at 3.8 million bales.
U.S. COTTON PRODUCTION & USE - Looking at the 2012 crop year, USDA estimates exports at roughly 13.0 million bales while U.S. production is estimated at 17.3 million bales and mill use is estimated to be 3.5 million bales. For 2013, exports fall to 10.5 million bales while mill use is expected to climb to 3.60 million bales. Production is expected to fall. USDA estimates U.S. production to be 12.9 million bales for 2013/14. For 2014, mill use is expected to reach 3.8 million bales, up from the previous year while production is expected grow to 16.5 million bales and exports are expected to fall to 10.2 million bales.
WORLD MARKET – Exports of U.S. cotton will be dependent on conditions in the world market.
CHINA COTTON SUPPLY & USE – For China, production is expected to climb to 35.0 million bales for the 2012 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 36.0 million bales. For 2013, production will fall to 32.0 million bales while mill use falls to 34.5 million bales. For the 2014 crop year, USDA projects production to drop to the 29.5 million bale range while mill use climbs back to the 36.5 million bale range.
WORLD COTTON PRODUCTION - USDA estimates put the 2012 crop at 123.0 million bales and 118.3 million bales for the 2013 crop. USDA estimates for 2014/15 show world production at roughly 116.4 million bales.
WORLD FIBER DEMAND – The 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 July report, USDA estimates 2012 world mill use at 106.8 million bales and 108.5 million bales for the 2013 crop year. For crop year 2014 mill use is set at roughly 111.3 million bales.
FOREIGN PRODUCTION & USE – The gap between foreign production and use influences our ability to export cotton. The gap narrows between production and consumption in 2012 with production forecast at 105.6 million bales and mill use at 103.3 million bales. For the 2013 crop year, production is estimated at 105.4 million bales and mill use at 104.9 million bales. For the 2014 crop year, production is estimated at 99.9 million bales and mill use at 107.5 million bales.
U.S. COTTON EXPORTS – According to USDA, the U.S. will export 13.0 million bales in the 2012 crop year.In 2013, exports fall to 10.5 million bales. For 2014, exports continue to fall to an estimated 10.2 million bale mark.
WORLD ENDING STOCKS - World stocks on July 31, 2013 are projected to reach 90.0 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 100.6 million bales by the end of the 2013 marketing year. By the end of the 2014 marketing year, stocks are estimated to climb to 105.7 million bales.
COTTON STOCKS/USE – Another 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 climb to 58%. In 2008, the stocks-to-use ratio should be somewhere around 62% 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 56% in the 2012 marketing year and is expected to drop to 52% through the 2013 marketing year. For 2014, the ratio is forecast to climb to 58%.
U.S. SUPPLY & DEMAND – In its July report, USDA gauged U.S. 2013/14 cotton production at 12.9 million bales. Mill use was estimated at 3.6 million bales and exports were estimated to be 10.5 million bales. The estimated total offtake now stands at 14.1 million bales generating ending stocks of 2.7 million bales and a stocks-to-use ratio of 19.1%.
U.S. production is estimated to be 16.5 million bales for 2014/15. Mill use is estimated at 3.8 million bales while exports are reported to be 10.2 million bales. The estimated total offtake stands at 14.0 million bales. With beginning stocks of roughly 2.7 million bales, this would result in U.S. ending stocks of 5.2 million bales on July 31, 2015, and a stocks-to-use ratio of 37.1%.
WORLD SUPPLY & DEMAND – In USDA's July report, world production for the 2013/14 marketing year was estimated to be 118.3 million bales. World mill use was estimated at 108.5 million bales. Consequently, world ending stocks are estimated to be 100.6 million bales with a stocks-to-use ratio of 92.7%.
World production is estimated at 116.4 million bales for the 2014/15 crop year. Mill use is set at roughly 111.3 million bales. With beginning stocks of 100.6 million bales, this would result in world ending stocks of roughly 105.7 million bales on July 31, 2015, and a stocks-to-use ratio of 94.9%.