Who is Your Competitor in 2010?

Good afternoon and thank you for this opportunity to talk with you today.

Mark Williams called me and asked me to speak to you on the topic of China and Africa. After giving this some consideration, I decided and, hopefully for your interest, to attempt to explore who the American cotton producer’s competitor will be in the future, 2010!

In preparation for this subject, I talked and researched around the world. Most of the comments from our Dunavant staff and others were “you are crazy, it is hard enough to forecast this year let alone six years forward.” So of course it is quite easy to qualify what I am about to discuss with you by saying weather, price, political situations, economic disasters, agricultural subsidies, water shortages, WTO, insect attacks, plagues, terrorism and crazy merchants ideas could change any of my numbers, at any time, so let’s give it a try.

So how do we get to 2010? Let’s start with the U.S.

1. Domestic consumption

We all know the sad decline of the American domestic consumption – 45% in 6 years to 6.2 million bales. This should be of tremendous disappointment to everyone in this room because, you had no competition for that business. Not to mention the loss of liquidity in the New York futures market due to the corresponding loss of domestic mill fixations. Thus with this dynamic, our futures market becomes more not less volatile. I will assume, for this presentation, a 3.5% annual decline in domestic consumption in the U.S. over the next six years to 5 million bales for 2010, which could be conservative.

2. Agricultural subsidies

We all know that in 2007, if not earlier, we will negotiate new farm legislation. Unfortunately, the UnitedState’s cotton subsidies have been and will continue to be in the WTO and global trade spotlight. 

Everyone in this room is tired of the bad press, editorials, reports and the underlying attacks on our farm programs, but unfortunately they will continue. I have read with great concern the recent comments on restarting the Cancun round by our USTRr Ambassador Robert Zoellick, which specifically mentions cotton. His rhetoric is a forewarning of problems for the future of world and American agricultural subsidies.

For the sake of this presentation, I believe we will see changes by 2010 that will result in a 10% - 20% decrease in United States cotton production to 15 to 17 million bales. I am not going to debate which, when, or what changes will occur to the program just that some provisions will change. My problem with world cotton subsidies is the whole world subsidizes except Australia. In the world of global trade, the Americans and Europeans live in transparent societies. The entire world can clearly see how our programs are administered and function, unfortunately today this is being used against you. There is no way to see agricultural subsidies in opaque societies such as China, the CIS and to a certain extent Africa. This is why free and fair trade is not attainable and our USTR ambassador better start understanding which economy is the largest in the world and use it for all the leverage that it deserves.

Since United States cotton exports are your future, let’s set the current table of numbers today:

As you look at the chart, world exports at 32,700 reflect 33.7% of world consumption. You can clearly see it will be nearly impossible for the United States to maintain the commanding export market share we have today of 41%. But as we put 2010 projections beside 2003, let’s investigate what our future is and who we will compete against:

Briefly, let us look closely at what the chart shows:

1. I assume about a 2% annual growth in consumption.
   
   
2. Exports maintain 33.5% of world consumption. This estimate is very difficult to gauge as a correct assumption.
   
   
3. For the sake of this chart, I assume United States production in 2010 to be 15 to 17 million with domestic consumption of 5 million or less.
   
   
4. The United States will lose 10% export market share because of the loss of production due to decreases in subsidies.
   
   
5. China will remain the largest importer of raw cotton in the world.
   
   
6. The CIS countries and particularly Uzbekistan will lose about 5% share of exports to a 3% per annum gain in local consumption. These countries will attempt to increase their foreign currency reserves by value added textile spinning and production, selling textile products versus raw cotton. This will mirror what Pakistan very successfully did in the early 90’s.
   
7. Australia, with the drought partially broken, will be back, but not to the recent levels of nearly 4 million bales production. I believe they will, subject to water, consistently export 2.5 to 3.5 million bales. This cotton, competes, or diplomatically speaking, complements, SJV cotton.
   
   
8. Brazil as you can see will be the new export player of the future. I expect a minimum jump in export share of 9% to 10%. A projected increase of 5 million bales of production may prove too conservative.

Now that the road map for 2010 is laid, I want to look at the specifics of key areas and countries to our future.

First and the most important for sure, will be the fate of our business in china. In China with 31% of world consumption, 24% of world production, and at least 22% of world exports moving to china. So where are they in 2010? 

Recently, at the world economic forum in Davos, Switzerland, it was estimated that by 2010 the Chinese economy will equal the size of Germany and by 2040 will equal the size of the United States economy. 

We can state the obvious facts, China will need to import a huge amount of industrial commodities if they are to come close to an annual gdp growth rate of 8%. In 2005 all textile quotas will fall off, to china’s distinct and complete advantage. We know China is the largest buyer of textile equipment in the world. They are set to grow, period! 

But growth comes at a cost, from which you the largest and most successful cotton exporter should benefit. 

First, with all this real growth comes an estimated annual loss of chinese agricultural acreage of 2% per year due to urban sprawl and industrial development. 

Secondly, China is one of the fastest growing world economies. I believe an 8% GDP growth rate for the next 6 years in China will be difficult to sustain. With estimates for Chinese population growth, food production will continue to be more important than fiber production. We all know what China’s recent grain buying binge has done to those markets.

For 2010, I believe their cotton production will be between 25 to 27.5 million bales, but not grow enough to satisfy their consumption demand of 34 to 36 million bales, thus providing the largest importing market in the world of 8 to 10 million bales by 2010.

The next area of great interest and concern at the same time for you as producers and that we are paying a lot of attention to is Brazil:

There is no question in my mind that they will become one of our major competitors in the world of cotton. In the late 90’s Brazil’s cotton industry moved west to Mato Grosso. A new type of producer/businessman went there to make things happen and boy … did they.

Farming in Brazil, today, is not a cultural issue; it is a business issue and a big one. The Brazilian producer’s practices are similar to ours in America, the way they manage their farms are equal, and in some cases better than ours. They have copied some of our models of producing, researching, picking, ginning and other uses of our technology. They have compared them to the ones used in other progressive cotton-producing countries such as (Australia and Turkey) and adapted to their areas of production. The results are “extraordinary” and in the last 5 years they have created one of the greatest expansion areas in the cotton world.

The Brazilian base quality is slm 1-3/32 and their yields are around 1,400/1,450 pounds per acre and their cost of production is (depending upon the exchange rate) about $475-$500 per acre or about 35.00 cents/lb before rent and/or depreciation costs.

Yes, you heard me - 35.00 cents/lb!!!

With this kind of cost and the potential to reduce costs by farming larger areas, say 100,000 acres (the largest Brazilian producer has almost 150,000 acres in cotton) we and other major producing countries can expect very strong competition from brazil. We have to remember that the cotton acreage in this part of the world can double even before 2010.

We see Brazil producing 9.5 million bales in 2010 versus 5 million today and exporting 5.7 to 6 million bales by that time. There are of course huge problems for growth of this magnitude in this country, as the infrastructure in their transportation systems could collapse if something is not done soon and I mean very soon. Please do not forget that this country could also become the number one soybean producer and exporter of the world. We regard Brazil as a potential future member of the G-8 developed economic nations in this century.

Their textile industry on the other hand will take a portion of the international market competing with China, India, Turkey and Mexico. I do not see them increasing their domestic consumption of 3.6 million bales of cotton as dramatically as I see them increasing their cotton production. Basically, this is because of the great investment required to compete internationally and the cheap labor costs of China and on a lesser scale India. So by 2010 the Brazilian textile industry may reach 4.5 million to 5 million bales of consumption.

Ladies and gentlemen do not doubt that Brazil will be a tough and great challenge to the United States cotton producer and textile industry.

Turning now to Africa, collectively, as was mentioned previously is now the world’s second largest exporter. I would like to show you a breakdown of total african production in 2003/2004.

As you can see many countries make up africa’s production. First look at west africa, all of the west african production is rain grown and hand picked and are of very similar high grade or sm 1-1/8 quality. The biggest drawback to african cotton is contamination. But we are seeing improved acceptance of these cottons throughout the world. Bt cotton will have a huge impact in the future of african production because of lack of infrastructure for the distribution of chemicals and insecticides.

We have heard a lot of recent comparisons to the growers in this room versus your West African counterparts. It is really easy to criticize you the American producer, but I believe in dealing with the complete picture. The question begs, how transparent are West African export taxes and taxes on imports of agricultural inputs or governmental financial aids to some mismanaged cotton producing companies. If we are comparing, the question begs how much or what percentage of the true income of these farmers, who have no alternative than to grow cotton to make a living, is being given directly back to them versus to their governments or political figures. The answer is, no matter how hard we try, the press comparisons will never be apples to apples. It just sells newspapers!

If you look at West African production of 4.8 million bales, it is worthy to note east Africa and its 1,675 million bales excluding Egypt, Sudan and Nigeria. These countries in the future will need to be closely watched as I believe the growth potential is enormous because of the abundance of land, water and the effects of Bt cotton. 

What we are clearly not seeing is any growth in consumption of the Arican continent that was predicted when our government signed the African Growth and Opportunity Act [AGOA] in 2000. Let’s take a brief look at African consumption.

The sad part of this statistic is the fact that textile mills have to have a skilled work force. In some of these countries if you can find the skilled workers, aids, malaria and other epidemics will take 30% of them away every five years. This hardly makes textile companies bullish on investing in spinning in Africa not to mention the high energy cost as well. Africa will therefore, continue to be more of a major export competitor of raw cotton rather than textiles and apparel.

Now let’s turn to the CIS countries with Uzbekistan by far the largest with 61% of CIS production. Our mill customers worldwide very much like the quality, consistency, and slow ginning of Uzbek cotton. This consistency comes from the classing of hand picked seed cotton, delivered to the gin or collection points. The same statements are consistently made about Chinese and African cottons. As I mentioned the growth in local consumption will continue to decrease CIS exports to your long term advantage.

Finally, Australia – they are just finishing the worst drought in 100 years, so that tells me the odds are back in their favor or I hope so. With so much SJV acreage moving to pima, the Aussie future looks bright but is limited. Limited by water, environmental issues and price. I believe they will consistently produce between 2.5 to 3.5 million bales of very high quality sm 1-1/8 fiber which is in big export demand. They are a high yielding country of 1,400/1,800 pounds, with no agricultural subsidies. We all know how successful their seed breeding has been, i.e. The fibermax. The typical breakeven price subject to currency fluctuations for the Australian farmer is 57 to 61 United States cents per lb on 3 bale yields. Basically, all this cotton moves to export channels.

In conclusion, as you have seen the world will still very much need you, as the leaders in world cotton exports. To do so we need to have a more consistent fiber and logistical and warehouse systems that works more efficiently. We do not have the past luxury of shipping a domestic industry of 11 million bales over twelve months. Last year, and for the future we will remain a predominantly an export-oriented business. This increase in export demand will now ship out very quickly from October to May.

The cotton business has changed. If this industry cannot compete because of inconsistent quality or warehouse delays, truck or equipment shortages, your export customers have options of buying other foreign growths. This is not domestic business anymore, with no foreign competition. Ladies and gentlemen, I have to encourage you to look at the complete picture of cotton-farming, ginning, warehousing, logistics and merchandising because the business has changed due to your export competitors. We can and will compete, but it will be an American producer driven effort to encourage all segments to stay competitive.

Thank you for your help and time in working together to stay the world leader in cotton.