Prepared by:
Economic Services - National Cotton Council
January 2010
TO CONVERT BALES TO METRIC TONS:
number of bales / 4.59
TO CONVERT ACRES TO HECTARES:
number of acres * 0.40469
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 decreased at an annual rate of 0.7 percent in the second quarter of 2009 and increased at an annual rate of 2.2 percent in the third quarter of 2009.
OK-WTX CRUDE OIL SPOT PRICE – Since the end of September 2008, prices have fallen below the $100 per barrel mark. Currently, prices are hovering between $80.00 and $81.00 per barrel.
#2 DIESEL FUEL RETAIL PRICE – Diesel prices have followed the same trend as that of crude oil prices. The current retail price for #2 diesel fuel is roughly $2.10 per gallon.
UNEMPLOYMENT RATE –The unemployment rate is 10.0% for December, unchanged from the previous month.
FEDERAL BUDGET SURPLUS – The latest projections by the Congressional Budget Office (CBO) show deficits continuing for the next several years. For fiscal ’09, CBO projects a deficit of $1.6 trillion. That deficit is projected to fall to close to $1.4 trillion in 2010. Deficits persist through 2017.
CBO AG BASELINE SPENDING – Looking at fiscal 2009 through 2012, commodity programs are expected to costs between $8.0 and 11.0 billion per year, with conservation programs adding an additional $3.6 to $5.7 billion per year. Within commodity support, cotton outlays average about $1.7 billion per year.
WORLD REAL GDP GROWTH –The International Monetary Fund estimates that the world economy will decline by 1.1 percent in 2009 as a whole before rising modestly during the course of 2010. China’s economy is expected to drop from 9.0% growth in 2008 to 8.5% growth in 2009. Estimates for India show GDP growth of 7.3% for 2008 and slowing in 2009 to 5.4%.
PERCENT CHANGE IN VALUE OF U.S. DOLLAR - During 2009, the U.S. dollar depreciated against the euro, reversing its appreciation that occurred during the previous few months.
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 above 125 in 2003, but now sits at roughly 102.
AG PRICES RECEIVED – The U.S. Department of Agriculture (USDA) publishes monthly indices of prices received by farmers. The index of crop prices now stands at 152. The index of livestock prices is up from last month at 118.
NET FARM INCOME – Net farm income is forecast to be $57.0 billion in 2009, down $30.0 billion (34.5 percent) from 2008. The 2009 forecast is $6.5 billion below the average of $63.6 billion in net farm income earned in the previous 10 years.
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 2010 contract has averaged roughly 9.00 cents per pound higher than the December 2009 contract. Currently, the 2010 contract sits at roughly 74.00 cents per pound.
DEC CORN FUTURES - Between August 1, 2009 and mid-January 2010, the average value of the December 2010 futures contract was roughly $0.87 per bushel lower than the December 2009 contract. However, the December 2010 corn contract closed at $4.06 per bushel on January 15, 2010, just under where it was at the same time last year.
NOV SOYBEAN FUTURES - Over the life of each contract, the November 2010 soybean contract has averaged roughly $0.72 per bushel lower than the November 2009 contract.
U.S. COTTON ACREAGE– According to USDA’s revised June acreage estimates, U.S. cotton plantings are projected to be 9.15 million acres, down 3.4 percent from 2008. Upland planted area is estimated to have decreased 3.1 percent to 9.01 million acres. ELS cotton producers planted 142,000 acres, down 18.6 percent from 2008. On a regional basis, upland area in the Southeastis down 1.7% to 1.89 million acres. Planted acres are expected to fall to 1.63 million acres in the Mid-South in 2009, down 13.3% from the previous year. In the Southwest, estimated upland area is up 0.7% to 5.24 million acres. Estimated upland area in the Westis down 15.9% to 247,000 acres. USDA estimates ELS plantings of 142,000 acres, down 18.6% from 2008-09.
U.S. COTTON PRODUCTION – In its January report, USDA estimates that the U.S. produced a crop of 19.2 million bales in the 2007 crop year. For 2008, the USDA forecast U.S. production at 12.8 million bales. A slight drop is projected for the 2009 crop with production falling 420,000 bales to 12.4 million bales.
U.S. COTTON SUPPLY – InUSDA’s January report, USDA estimates production at 19.2 million and beginning stocks of 9.5 million for the 2007 crop year. Combined with imports of 10,000 bales, this gives total supplies of 28.7 million bales for the 2007/08 marketing year.
For the 2008 crop year, combining projected production with expected beginning stocks of 10.0 million bales results in a total U.S. supply of 22.9 million bales. This is down more than 5.8 million bales from the 2007 level.
By adding beginning stocks of 6.3 million bales to the roughly 12.4 million bale crop, USDA believes total U.S. supply will drop roughly 4.1 million bales to 18.8 million bales in 2009.
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 2008 was 48.6 million bale equivalents. Cotton’s share of net domestic consumption increased 0.9% this past year to 45.1%, which translates to 21.9 million bales. As for 2009, NCC projects net domestic consumption of all fibers to decrease to 47.5 million bales. With a projected share of 43.9%, cotton’s net domestic consumption is projected to be 20.9 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 had generally been on the rise. In 2002, cotton’s share reached roughly 44%. 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 44.2%. For 2007, cotton’s share of the retail markets remained roughly unchanged at 44.2%. For 2008, cotton’s share of the retail markets dipped just under the 44.0% mark.
U.S. RETAIL COTTON CONSUMPTION (MONTHLY) – The U.S. retail market reached 21.0 million bales of cotton textile products for calendar 2008. Data through September show us running under last year’s pace by roughly 2.2 million bales. Continuing at this pace would put the retail market around the 19 million bale mark.
U.S. RETAIL COTTON CONSUMPTION (HISTORICAL) - Imported goods make up the largest portion of U.S. net domestic consumption. However, for the second year in a row, imported cotton textiles declined slightly from 23.4 million bale equivalents in 2007 to 21.9 million in 2008. NCC projects U.S. net domestic consumption to decline slightly in 2009 to 20.9 million.
U.S. COTTON TEXTILE IMPORTS - Increasing imports over the past several years have devastated the U.S. textile and apparel industries. While cotton textile imports did not increase in calendar 2008, they still made up almost 99% of U.S. net domestic consumption of cotton. Imports of cotton goods in 2008 diminished by 5.1% to 21.6 million bale equivalents. In calendar 2009, NCC projects cotton textile imports to shrink slightly to 21.5 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 28.0% of all cotton goods imported in 2008 contained U.S. cotton. This is a 0.4% decrease over the previous year. In bale equivalents, these imported cotton goods contained 6.1 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 2008 were 1.5 million bales, down approximately 7.1% from the previous year. This marks the eighth straight year in which imports from Mexico have declined.
COTTON TEXTILE TRADE WITH CBI – Imported cotton goods from CBI for 2008 were 3.1 million bale equivalents, down 2.0% from the previous year.
COTTON TEXTILE IMPORTS FROM CHINA (HISTORICAL) - For the fourth consecutive year, China was the largest supplier of cotton textile imports into the United States. However, total cotton product imports from China slowed slightly to 5.7 million bale equivalents in 2008, down 2.2% from 2007 but up 561.8% 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, 20.5% in 2005, 21.6% in 2006, and 25.5% in 2007 to 26.2% in 2008.
CALENDAR MILL USE - Mill use of cotton declined for the eleventh consecutive year in calendar 2008 to 4.4million bales, 9.7% below the amount consumed in 2007 and 20.3% below the 5.5 million bales consumed in 2006. For calendar 2009, NCC forecasts domestic mill use of cotton at 3.4 million bales.
CALENDAR MILL USE (MONTHLY) – Milluseis running at a slower pace compared to last year. Data through November shows U.S. mill use more than 1.0 million bales behind last year’s pace.
CROP YEAR MILL USE – USDA’s latest estimate for mill use in the 2008 crop year is 3.6 million bales. Current estimates are 3.4 million bales for the 2009 crop year.
U.S. COTTON PRODUCTION & USE- Pulling the U.S. balance sheet together for 2007, we see that exports improve and mill use remains under pressure. Looking ahead to the next marketing year, USDA expects exports to weaken while both U.S. production and mill use continue to fall. For 2009, USDA expects exports, mill use and production to continue to fall.
WORLD MARKET – Exports of U.S. cotton will be dependent on conditions in the world market.
CHINA COTTON SUPPLY & USE – For 2008, USDA estimates that Chinese mill use will be 45.0 million bales.
In ’07, production approached 37.0 million bales. For ’08, USDA forecasts production will fall to 36.7 million bales. These projections imply a good size differential between production and mill use, leading to imports of 7.00 million bales.
Looking forward for China, production is expected to drop to 32.0 million bales for the 2009 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 46.8 million bales.
WORLD COTTON PRODUCTION - Looking at the world totals, USDA estimates a 2007 crop of 119.9 million bales. The crop falls 3.6 million bales short of USDA’s consumption estimate, 123.5 million bales. USDA estimates put the 2008 crop at 107.5 million bales and 102.7 million bales for the 2009 crop.
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 2007, consumption topped 143 million bales. This is over 21 million bales above their estimate of the consumption of cotton. Just 10 years ago, cotton held almost a 17.4-million bale advantage over polyester. For 2008, PCI estimates polyester consumption to rise to approximately 148.5 million bales.
FIBER PRICES – While manmade fiber prices moved higher, cotton prices weakened substantially as we went through 2004. Since 2004, cotton prices have slowly worked their way back to the level of manmade fiber prices. Currently, cotton prices are roughly $0.12 cents above manmade fiber prices.
WORLD COTTON MILL USE – In its January report, USDA estimates 2007 world mill use at 123.5 million bales. Estimates released by the USDA put the 2008 world mill use at 111.1 million bales and 114.4 million bales for the 2009 crop year.
FOREIGN PRODUCTION & USE – The gap between foreign production and use influences our ability to export cotton. For the 2007 marketing year, foreign mill use is estimated at 118.9 million bales with production at 100.7 million bales. For ’08, foreign production is forecast at 94.7 million bales with mill use outside of the U.S. estimated at 107.5 million bales. The gap widens between production and consumption in 2009 with production forecast at 90.3 million bales and mill use at 111.0 million bales.
U.S. COTTON EXPORTS – According to USDA, exports fall in the 2008 to 13.3 million bales and continue to fall in 2009 to 11.0 million bales.
WORLD ENDING STOCKS - World stocks on July 31, 2008 are projected to reach 62.2 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 fall to 60.9 million bales by the end of the 2008 marketing year. By the end of the 2009 marketing year, stocks are estimated to be roughly 51.7 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 56% for the 2005 marketing year and 58% for 2006. For 2007, the ratio is projected to climb back to 59%. In 2008, the stocks to use ratio should be somewhere around 61% and 51% in 2009.
U.S. SUPPLY & DEMAND – To summarize the U.S. situation, a smaller crop results in a lower total supply in ’08. Combined, mill use and exports are greater than expected production, leading to a decline in stocks to roughly 6.3 million bales.
WORLD SUPPLY & DEMAND – For the world balance sheet, production is now topping 119.9 million bales for 07/08. USDA expects 08/09 production to fall to 107.5 million bales. For 08/09, mill use is below the previous year. The USDA’s projected world mill use is 111.1 million bales, and barring exceptional yields, world production will not keep pace. Stocks, on a global basis, are projected to fall to 60.9 million bales.