Macroeconomic Situation
Analysts are still reasonably optimistic about the prospects for world economic growth in ’04 and ’05. China’s economy continues to grow at a fast pace with growth for ’04 projected at 9%. India’s economy is expected to expand by 7% this year. For major developed economies, the EU’s growth is pegged at just under 2%. After posting strong growth in the first quarter, Japan’s economy is projected to grow by 4.5% for ‘04.
The US economy grew by 4.5% in Q1 of ’04 and preliminary estimates for Q2 are 3%. Sluggish job creation continues to be a concern for the economy. In addition, it is uncertain as to the extent to which record high oil prices will slow the economy. As oil prices increase, the dollar was weakening relative to the euro and the yen.
Cotton Production
Over the past year, we have seen tremendous variability in cotton prices. Last fall, the A(NE) Index approached 80 cents as production fell well short of consumption and China stepped in with large purchases of cotton. However, since the spring, prices have declined with the A(NE) dipping below 52 cents.
World Cotton Production (1)
The low prices came on the heels of the latest USDA production estimates that put the world cotton crop at a record level of 106.5 million bales. If realized, it would represent a 12 million bale increase for last year, and 8 million bales above the previous record established in 1998.
World Cotton Production (2)
Overall prospects for the crop are still favorable as no widespread problems have developed. Both the US crop and the foreign crop are expected to grow relative to last year. The foreign crop is estimated in excess of 86 million bales while USDA puts the US crop at just over 20 million bales. For other countries, China is at 30 million bales, India at 12.75 million, Pakistan at 8.75 million, Brazil at 6 million, and Australia at 2.3 million bales.
Foreign Cotton Area Up 8%
The increased foreign crop is attributable, in part, to an 8% increase in area. The high prices at planting time encouraged more area in most countries. For example, China’s area is 13% above the ’03 level. Other increases are expected in India (6%), Pakistan (3%), and Brazil (2%).
U.S. Cotton Crop Condition
In the US, area for all cotton is up 3% from the ’03 level with upland cotton 2% higher and ELS acreage 41% above last year’s level. For upland acres, increases in the Southwest and West will more than offset declines in the Southeast and Mid-South. Although plantings are similar to last year’s level, the expectations for a larger crop are based on good yields and low abandonment. In USDA’s weekly Crop Progress reports, 70% of the crop is rated as good or excellent. This is a record-level for crop conditions and substantially higher than both last year’s number and the previous 10-year high.
At the state-level, Louisiana has the lowest ratings with 24% rated poor to very poor. In California, 100% of their crop is rated good to excellent.
Based on these conditions, it’s hard to argue too much with USDA’s estimate. There are still some wildcards. It is important to remember that crop conditions generally decline from this point forward. A number of problems could develop before the crop is at the gin. Finally, how big will the Texas crop be?
% of World Cotton Production
For a perspective on recent trends in production, we can compare the shares of world production accounted for by each of the major countries or regions. China is the largest producer of cotton accounting for 26% of the world crop over the past 3 years. The US is second with 19%. Over the past 9 years, the share of world production has been relatively stable for several of the major producers. The two regions of growth are Brazil and China. Over the past three years, Brazil ahs accounted for 5% of the world crop, up from 2% for the 96-98 period. Further expansion is expected given the availability of land in Brazil.
World Fiber Mill Use
The slow growth in total demand of cotton continues to be the biggest challenge facing the market. We are continuing to see cotton lose market share relative to manmade fibers, particularly polyester. In 1984, cotton mill use was 84 million bales, while polyester accounted for 59 million bales. Since that time, polyester use has shown tremendous growth, particularly in Asia, and we saw polyester use surpass cotton in 2003. For ’04, the PCI group projects polyester use of 108 million bales, while USDA expects cotton use to reach 100 million bales.
Cotton’s Share of Retail Fiber Market
Competition from manmade fiber continues to be the greatest challenge facing cotton demand. In the U.S., the success of an effective promotion campaign is evident with cotton increasing share of the retail fiber market. Outside of the U.S., it is a very different story. Cotton is consistently losing ground to synthetic fibers. To make matters worse, consumers outside the U.S. are 95% of the world’s population.
U.S. Cotton Retail Consumption
Through May, US retail consumption of cotton products was roughly 500 thousand bales below this same time last year. Imports of cotton textile products year to date are roughly the same as this time last year. Exports of cotton products are slightly higher will mill use is lower. For calendar ’04, total retail consumption of cotton products is estimated at 20.6 million bales, down from 21.2 in ’03. The “dirt-to-shirt” component is estimated at just over 1 million bales and imports pegged at 19.5 million bales.
Top Suppliers of Cotton Product Imports to US Market
After peaking at 35% in 1999, the share of US cotton product imports supplied by NAFTA and CBI countries has fallen to 27% for ’04 year-to-date. China now accounts for 15% of imports, and Pakistan accounts for 13%. China’s share has doubled since their entry into the WTO in late ’01. Looking ahead to next year, I would expect these recent trends to grow with the elimination of quotas.
U.S. Cotton Mill Use
For the ’03 crop year, mill use is estimated at 6.3 million bales, which is 1 million bales below the previous year. For ’04, USDA puts mill use at 5.9 million bales. Further declines will occur as imports of textile products continue to increase. The pressure from additional imports in calendar ’05 could make USDA’s current estimate the upper end of a likely range. We may also see mill use fall as low as 5.7 million bales.
Share of World Cotton Mill Use
After remaining stagnant through much of the ‘90s, we have seen growth in mill use in recent years. However, the growth has been concentrated in only a few countries, with China being the primary growth region. Since 1998, China’s share has grown from 20% up to roughly 35% projected for ’04.
World Cotton Trade & Top Cotton Exporters
The shift in mill use has led to an increase in total cotton trade. With the steep decline in US mill use, the US share of world trade has also grown. In the recently concluded ’03 marketing year, U.S. raw cotton exports hit a record 13.8 million bales. China emerged as the largest buyer with purchases of 5 million bales. Mexico, our largest customer for the previous 6 years, fell to second with 1.8 million bales. Turkey remained our 3rd largest customer.
The record exports can also be attributed to the fact that foreign production was 17 million bales below foreign cotton mill use. For ’04, the expected recovery in foreign production will cut the gap to 8 to 10 million bales and lower US exports of raw cotton. USDA put US exports at 12 million bales for ‘04/05, which is a target that may be reachable is we also see a rebuilding of stocks in other countries. If not, this estimate could prove to be optimistic. There is also the potential for exports to be in the 10.5 to 11 million bale range.
We also must keep in mind that we do not currently have the Step 2 in effect. This week represents the first qualifying week for reinstatement of the program. However, when it does return, it will be using the Memphis quote and be substantially smaller than what was observed in July.
Countries in Central Asia and West Africa have remained steady suppliers to the world market, while Brazil is emerging as a significant exporter.
Top Cotton Importers
Asian countries excluding China remain a steady importer of 12 to 14 million bales. China has shown its ability to enter the world market with significant purchases. Imports by Western Hemisphere countries have decline over the past two years.
U.S. Exports vs China Imports
Looking over the past decade, there’s a strong correlation between US exports and China’s imports. When they buy a lot of cotton, we sell a lot of cotton. Looking forward, the ability of the US to find a home for 12-13 million bales depends on what China does.
World Cotton Ending Stocks
With a record crop likely to exceed mill use, stocks should recover by the end of the ’04 marketing year. USDA’s latest numbers put world stocks at just under 40 million bales, 6 million bales above the ’03 level. Although still below historical highs, it is the case that stocks outside of China are at levels second only to 2001.
“A” (NE) Index & Nearby Futures
The expectation of increased global production has pressured prices lower. The A(NE) fell by 30 cents/pound since last fall. A similar drop was shown by the nearby futures contract. We have seen a slight recovery in recent days.
Key indicators such as cotton stocks-to-use in the world outside of China and China’s net imports show a strong correlation with prices. Both point to prices lower than in ’03. In fact, they also indicate that this year’s average “A” (NE) price could be very similar to current levels.
Cotton Gross Receipts
For the ’03 crop year, preliminary estimates put the MYA price at 62.5 cents. This implies a total CCP of 3.2 cents. Since 2.01 cents was issued last fall, then the remaining payment would come once final prices are known. NASS can move the final price around based on final marketing data.
Looking ahead to ’04, current indicators suggest a farm price below the loan rate. If so, the CCP will be at the maximum of 13.73 cents.
Summary
To summarize, a record world crop expected. However, there is still a long way to go until the crop’s out of the field. Current estimates suggest a rebuilding of stocks, and the price outlook hinges on final crop size and China’s imports.
