Prepared by:
Economic Services - National Cotton Council
April 2008
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 4.9 percent in the third quarter of 2007 and 0.6 percent in the fourth quarter of 2007.
OK-WTX CRUDE OIL SPOT PRICE – Since October of 2007, prices have been over the $80 level and have topped the $100 per barrel level on several occasions. Currently, prices are hovering around the $114 per barrel mark.
#2 DIESEL FUEL RETAIL PRICE – As crude oil prices increased, diesel prices have followed suit. The current retail price for #2 diesel fuel is roughly $3.42 per gallon.
UNEMPLOYMENT RATE –The unemployment rate is 5.1 for March, up slightly from the previous month.
FEDERAL BUDGET SURPLUS – As U.S. agriculture is involved in a farm bill year, the current budget situation takes on even greater importance. The latest projections by the Congressional Budget Office (CBO) show deficits continuing for the next several years. For the current fiscal ’08, CBO projects a deficit of $357 billion. Deficits persist through 2011, only becoming a surplus on the assumption that various tax increases occur as scheduled.
In the farm bill debate, the budget situation will ultimately play a role in determining the amount of funds the agriculture committees will have to work with in crafting the next farm bill.
CBO AG BASELINE SPENDING – As Congress considers alternatives for the farm bill, CBO has the final say on the expected costs. Any option will be measured against CBO’s baseline, which assumes a continuation of current policies. Looking at fiscal 2008 through 2012, commodity programs are expected to costs between $8.1 and 8.4 billion per year, with conservation programs adding an additional $4 to $5 billion per year. Within commodity support, cotton outlays average about $1.2 billion per year. Again, it’s important to remember the CBO baseline against which any alternatives or changes will be measured.
WORLD REAL GDP GROWTH –The International Monetary Fund estimates that the world economy expanded by 4.9% in 2007 with slightly lower growth expected for this year. For developed economies, Europe and Japan remain resilient, and that should help to weather the expected slowdown in the U.S. economy. One of the concerns for the U.S. economy is the slowdown in the housing market. China’s economy is expected to go from 11.4% growth in 2007 to 9.3% growth in 2008. Estimates for India show GDP growth of 9.2% for 2007 and slowing in 2008 to 7.9%.
PERCENT CHANGE IN VALUE OF U.S. DOLLAR - Since late 2005, the U.S. dollar has depreciated against the euro, reversing its appreciation that occurred during the previous 12 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 100.
AG PRICES RECEIVED – The U.S. Department of Agriculture (USDA) publishes monthly indices of prices received by farmers. The index of crop prices received was 107 in January 2006 and rose steadily to 126 by December 2006. This healthy growth was the result of strong grain demand by the burgeoning biofuel industry. The index now stands at 171. Livestock prices, on the other hand, declined throughout the spring of 2006. Starting the year at 117, livestock prices remained relatively flat, falling to an index value of 113 in December. The decline can be attributed to adjustments in the livestock inventories made in anticipation of higher feed costs and low forage inventories. The index of livestock prices for March 2008 is 133.
NETFARM INCOME – Net farm income is forecast to be $92.3 billion, up 4.1 percent above the $88.7 billion farmers are projected to have earned in 2007 and 51 percent above its 10-year average of $61.1 billion. The story in 2008 is the value of crop production ($175.5 billion), which is forecast to exceed the 2007 record by $25.9 billion (a 17-percent increase). Prices of major crops (corn, soybeans, wheat) were trending upward in late 2007 and are expected to maintain or add to those gains in early 2008.
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 – Since August, the December 2008 NYBOT futures contract has continued to trade at a higher value than the December 2007 contract. Over the life of each contract, December 2008 has averaged roughly 16.80 cents per pound higher than the December 2007 contract.
DEC CORN FUTURES - Between August 1, 2007 and mid-April 2008, the average value of the December 2008 futures contract was over $1.19 per bushel higher than the December 2007 contract.
NOV SOYBEAN FUTURES - Between August 1, 2007 and mid-April 2008, the average value of the November 2008 futures contract was roughly $3.79 higher than the November 2007 contract.
U.S.COTTON ACREAGE - USDA’s March Prospective Plantings Report indicates U.S. producers intend to plant 9.39 million acres of cotton in 2008/09, down 13.3% from the previous year. Upland area is projected to be 9.19 million acres, down 12.8% from 2007/08 while ELS area is projected at 203,600 acres, a 30.3% decline. The NCC’s planting intention survey, released in early February, indicated U.S. farmers intend to plant 9.32 million acres to upland cotton and 231,000 acres of ELS cotton.
Projected upland area in the Southeast of 2.02 million acres represents a decrease of 10.3% from the previous year. Only growers in Georgia intend to increase cotton acres in this region, up 1.9% to 1.05 million acres. Virginia is unchanged from the previous year while all other states in the Southeast are expected to decrease acres by at least 15.0%. The largest percent change in the number of acres planted to cotton is expected to be seen in South Carolina (-33.3%) and Alabama (-25.0%).
In the Mid-South, projected plantings of 1.96 million acres represent a decline of 28.7% with all states in the region showing at least a 16.0% decline in planted acres. The largest declines will be seen in Tennessee (-39.8%) and Mississippi (-36.4%).
A decrease of 3.7% is indicated for the Southwest. Both Kansas and Texas will see acres decline roughly 4.0% while USDA estimates producers in Oklahoma will increase cotton acres to 190,000 acres, an increase of 8.6%.
Prospective upland plantings in the West are projected to decline 34.5% from the previous year with the largest decline projected for California, down 48.7% to 100,000 acres.
ELS plantings are projected to fall 30.3% to 203,600 acres. The greatest declines are expected to be seen in Arizona (-60.0%) and New Mexico (-45.8%).
U.S.COTTON PRODUCTION – In its April report, USDA estimates that the U.S. produced a crop of 21.6 million bales in the 2006 crop year, down 2.3 million bales from the 2005 crop. For 2007, the USDA forecast U.S. production at 19.40 million bales. At the 2008 Ag Outlook Forum in late February, the USDA forecast U.S. production at 15.0 million bales in the 2008/09 marketing year.
U.S.COTTON SUPPLY – In USDA’s April report, the 2005 crop is estimated at 23.9 million bales. This, along with beginning stocks of 5.5 million bales and imports of 30,000 bales, gives total supplies of 29.4 million bales for the 2005/06 marketing year. For 2006, USDA estimates production at 21.6 million and beginning stocks of 6.1 million. Combined with imports of 20,000 bales, this gives total supplies of 27.7 million bales for the 2006/07 marketing year.
For the 2007 crop year, combining projected production with expected beginning stocks of 9.5 million bales and 20,000 bales of imports give a total U.S. supply of 28.9 million bales. This is an increase of more than 1.23 million bales from the 2006 level.
By adding beginning stocks of 9.7 million bales to the smaller crop in 2008, USDA believes total U.S. supply will drop roughly 4.2 million bales to 24.7 million bales.
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 calendar year 2006 was 53.4 million bale equivalents. For 2007, net domestic consumption of all fibers dropped to 53.2 million bales. Cotton’s share of net domestic consumption was 44.0%, putting net domestic consumption of cotton at 23.4 million bales. For 2008, net domestic consumption of all fibers is forecast to fall slightly to 53.1 million bales. Cotton’s share of net domestic consumption is projected to be 43.8%, placing net domestic consumption of cotton at 23.3 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 hovered around the 44.0% mark.
U.S.RETAIL COTTON CONSUMPTION (HISTORICAL) - All of the increase in net domestic consumption for 2006 was due to the increase in imported goods, especially imports of textiles from China. Imported cotton textiles grew from 21.9 million bale equivalents in 2005 to 22.8 million in 2006. For the years 1993 through 1996, imports of textile and apparel products grew at an average rate of 6.9%. For the 4 year period following the Asian financial crisis (1997 through 2000), imports of textile and apparel products grew at an average rate of 16.1%.
U.S.COTTON TEXTILE IMPORTS - Increasing imports over the past several years have devastated the U.S. textile and apparel industries, and calendar year 2006 was no exception. Imports of cotton goods in 2006 grew by 4.3% to 22.8 million bale equivalents. In calendar 2007, cotton textile imports dropped to 22.8 million bales. Continued decline, however slight, will bring cotton textile imports down to 22.7 million bales in 2008.
U.S.COTTON CONTENT - When looking at 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 it appears by just looking at gross imports and exports. NCC analysts estimate that 27.5% of all cotton goods imported in 2007 contained U.S. cotton. This is a 2.2% decrease over the previous year. In bale equivalents, these imported cotton goods contained 6.3 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 - Once again, countries in NAFTA and CBI represented significant sources of imported cotton goods in 2007. Imports from Mexico in 2007 were 1.65 million bales, down approximately 15.3% from the previous year. This marks the seventh straight year in which imports from Mexico have declined.
COTTON TEXTILE TRADE WITH CBI – Imported cotton goods from CBI for calendar year 2007 were 3.2 million bale equivalents, down 7.3% from the previous year. The CAFTA-DR countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic are all part of the CBI region. Imports of cotton goods from CAFTA-DR in 2007 were 2.8 million, or 90.0% of the cotton textile imports from CBI. Combined, imports from NAFTA and CBI countries decreased 11.3% and accounted for 29.3% of total U.S. cotton product imports in 2007.
COTTON TEXTILE IMPORTS FROM CHINA (HISTORICAL) - For the sixth consecutive year, China was the source of one of the larger percentage increases in cotton textile imports into the U.S. Total cotton product imports from China increased to 5.8 million bale equivalents in 2007, up 17.7% from 2006, 575.4% from 2001 when China entered the WTO.
COTTON TEXTILE IMPORTS FROM CHINA – On November 8, 2005, the U.S. and China signed a broad agreement on Chinese textile imports into the U.S. The agreement went into effect on January 1, 2006 and ends on December 31, 2008 and places quotas on a broader range of textile and apparel product categories (34) than were subjected to safeguard action (19). The quotas established under the agreement compare favorably to quotas that would have been imposed if China textile safeguards were invoked. Over the life of the agreement, China can export 3.2% more of the covered products to the U.S. than if the safeguards were invoked on all of the covered products for all three years. In general, U.S. imports of Chinese goods covered by the agreement are allowed to grow by 10 to 12.5% in 2006, 12.5% in 2007, and 15 to 16% in 2008, depending on the item. Furthermore, in 2006, the agreement imposes tighter limits on U.S. imports from China of “core” apparel products. The “core” apparel products are cotton knit shirts, MMF knit shirts, woven shirts, cotton trousers, MMF trousers, brassieres, and underwear. Other items covered by the agreement include combed cotton yarn, cotton towels, glass fiber fabric, knit fabric, polyester filament fabric, special purpose fabric, synthetic filament fabric and thread, sweaters, socks/baby socks, swimwear, and blinds. As part of the agreement, the U.S. promised to exercise restraint in the future use of safeguards on products that are not covered by the agreement. The agreement also contains mechanisms to allow U.S. importers and the Chinese government to manage quotas to avoid overshipments. For example, China will manage its exports with a visa system and can borrow small amounts of quota from future years to cover overshipments.
With the agreement in place, imports from China for the agreement categories were approximately 1.8 billion square meter equivalents in calendar 2006. NCC estimates that imports from China for the categories covered in the agreement were approximately 2.2 billion square meter equivalents in calendar 2007. Imports from China for the categories not covered in the agreement were approximately 16.8 billion square meter equivalents for calendar 2006 and increased to an estimated 19.2 billion square meter equivalents for calendar 2007.
CALENDAR MILL USE - Mill use of cotton declined for the tenth consecutive year in calendar 2007 to 4.8 million bales, 12.0% below the amount consumed in 2006 and 23.6% below the 6.3 million bales consumed in 2005. The decline in mill use can be attributed to another year of record cotton textile imports. For calendar 2008, NCC forecasts domestic mill use of cotton at 4.6 million bales.
CROP YEAR MILL USE – USDA’s latest estimate for mill use in the 2006 crop year is 4.95 million bales. USDA projects domestic mill use of cotton at 4.7 million bales for the 2007 crop year.
U.S. COTTON PRODUCTION & USE - Pulling the U.S. balance sheet together for 2007, we see that exports recover and mill use remains under pressure. Looking ahead to the next marketing year, USDA expects exports to continue to strengthen while both U.S. production and mill use continue to fall.
WORLD MARKET – However, exports of U.S. cotton will be dependent on conditions in the world market.
CHINACOTTON SUPPLY & USE – Looking at China in more detail, their textile industry continues to expand. For 2007, USDA estimates that expansion in the Chinese textile industry will continue and mill use will be 53.0 million bales.
In ’06, production approached 35.5 million bales on higher area and better yields. For ’07, USDA forecasts production will drop slightly to 35.0 million bales.
These projections imply a good size differential between production and mill use, leading to imports of 12.3 million bales. That’s up from the 2006 estimate of 10.6 million bales.
Looking forward for China, USDA expects production to grow to 37.0 million bales for the 2008 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. USDA projects that this trend will continue in the near future pushing mill use to 56.5 million bales.
WORLD COTTON PRODUCTION - Looking at the world totals, USDA estimates a 2006 crop of 122.1 million bales, up 4.4 million bales from 2005. The crop falls 1.2 million bales short of USDA’s consumption estimate, 123.2 million bales. USDA estimates put the 2007 crop at 119.7 million bales and 123.0 million bales for the 2008 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 2006, consumption topped 130 million bales. This is over 10 million bales above their estimate of the consumption of cotton. Just 10 years ago, cotton held almost a 27-million bale advantage over polyester. For 2007, PCI estimates polyester consumption to rise to approximately 140 million bales.
FIBER PRICES – As oil prices have moved higher, we have seen it carry over into the prices of manmade fibers. 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 higher than manmade fiber prices by over 4 cents per pound.
WORLD COTTON MILL USE – In its April report, USDA estimates world mill use of 116.2 million for the 2005 marketing year. USDA estimates 2006 world mill use to rise to 123.2 million bales. Estimates released by the USDA put the 2007 world mill use at 124.9 million bales and 129.5 million bales for the 2008 crop year.
FOREIGN PRODUCTION & USE – The gap between foreign production and use influences our ability to export cotton. For the 2006 marketing year, foreign mill use is estimated at 118.3 million bales with production at 100.5 million bales. For ’07, foreign production is forecast at 100.3 million bales with mill use outside of the U.S. more than 120.2 million bales. The gap tightens between production and consumption in 2008 with production forecast at 108.0 million bales and mill use growing to 125.0 million bales.
U.S.COTTON EXPORTS – For exports, we’re coming off a year when exports dropped by over 4.5 million bales from the previous marketing year. For the 2007 marketing year, exports are estimated at 14.5 million bales. However, according to USDA, exports rebound in the 2008 crop to 15.0 million bales.
WORLD ENDING STOCKS - For the 2006/07 marketing year, world ending stocks are estimated at roughly 61 million bales.
World stocks on July 31, 2008 are projected to reach 59.6 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 leaves us with a lot of stocks to work through the system. According to USDA, stocks should drop to 57.0 million bales by the end of the 2008 marketing year.
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 fall to 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 60%.
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 5.2 million bales.
WORLD SUPPLY & DEMAND – For the world balance sheet, production is now topping 119.7 million bales for 07/08, lower than the 2006 crop of 122.1 million bales. USDA expects 08/09 production to climb back to 123.0 million bales. For 08/09, mill use continues to grow. The USDA projected world mill use of 129.5 million bales, and barring exceptional yields, world production will not keep pace. Stocks, on a global basis, are projected to decline.
