Macroeconomic Situation
Analysts are still reasonably optimistic about the prospects for world economic growth in ’05. Recent estimates put growth at 4%, down from 5.1% for last year.
According to the World Bank, China expected to grow at 9% for 2005.
The US economy grew by 3.8% in Q1 of ’05 and preliminary estimates for Q2 are 3.4%. Unemployment remains below this time a year ago. Concerns and uncertainty still exist as to the impact of the high oil prices on the economy. An index of leading economic indicators suggests slower growth in the second half of this year. In part, because of higher interest, but also the drag caused by record-high oil prices.
U.S. Crude Oil Spot Price
Since the beginning of ’04, oil prices have almost doubled, going from the mid-30’s to the mid-60’s. Analysts expect that prices will remain near current levels through 2006. Primary reasons are: First, worldwide petroleum demand growth is projected to remain robust during 2005 and 2006, although not as strong as in 2004. Second, production growth in countries outside of OPEC is not expected to accommodate incremental worldwide demand growth. Third, worldwide spare production capacity is at its lowest level in three decades. Finally, geo-political risks, such as the continued insurgency in Iraq and possible problems in Nigeria and Venezuela, are expected to keep the level of uncertainty in world oil markets high.
U.S. #2 Diesel, GulfCoast
We’ve seen similar increases in diesel prices over the past two years, having a direct impact on production and transportation costs.
2005 U.S. Cotton Acreage
The most recent estimates put U.S. cotton acreage at just over 14 million acres, up 3% from ’04. The increase in upland acreage is driven by the Mid-south and Southeast. ELS acreage is also above last year’s level.
U.S. Cotton Crop Condition
Although plantings are above last year’s level, current expectations indicate lower yields when we look across the Cotton Belt as a whole. An index based on the current crop ratings falls below the ’04 crop but above what we saw in ’03. The numbers in parentheses are final yields for the past two years and USDA’s estimate for this year’s crop released in last week’s crop report.
As a general rule, the biggest difference from last year is that less of the crop is rated in the excellent category. Looking at state numbers, ratings indicate better conditions in AL and GA. Otherwise, we’re generally seeing lower crop ratings for other states.
U.S. Cotton Supply
Looking at the U.S. crop, USDA puts production at 21.3 million bales, down 2 million bales from last year. The declines are in the Southwest and West with Midsouth and Southeast crops slightly larger than last year.
The U.S. production number reflects the yield of 748 pounds per acre and an abandonment of roughly 3%.
In general, the trade did not seem too surprised by the U.S. number. It would appear that USDA’s estimate for the TX crop could be on low side. However, recent hot, dry conditions in the Midsouth could cause their crop to fall off.
Having said that, an estimate for this year’s crop between 21 and 22 million bales seems reasonable.
However, even with the smaller crop, it is important to note that total supplies for the ’05 crop are larger than ’04 and at record levels.
U.S. Cotton Retail Consumption
Turning to demand, estimates show that the U.S. retail market reached 21.2 million bales of cotton textile products for calendar 2004. Data through June show us running above last year’s pace by about 1.2 million bales. Continuing at this pace would put the retail market between 22.5 and 23 million bales. We continue to see growth in the U.S. retail market.
U.S. Cotton Textile Imports from China
As we’ll see, the increase in the retail market is being supplied by China. In this first year of post-textile quotas, imports from China have surged with all cotton textile imports up 120%. In some categories, the growth has been more than 1,000%. The growth in imports has led to imposition of safeguards in several textile categories.
Active China Safeguards
The table shows current active safeguard categories, which apply to socks, knit shirts, and trousers, among others. With the exception of combed cotton yarn, the safeguard limits have been met.
Since these safeguard limits have been met, we’ll see slower growth in imports from China during the remainder of the year.
Although additional safeguard applications have been made, further determination has been put on hold pending the outcome of the textile trade talks.
U.S. Cotton Textile Imports from ROW
Imports from all other countries are virtually identical to last year’s level. As we look across countries, there’s a mix of winners and losers. India and Pakistan are up relative to ’04, in the neighborhood of 20%. Countries such as Taiwan and S. Korea are down from last year.
In the Western Hemisphere, imports from Central American countries are up from last year, while Mexico and Canada are below year ago levels.
U.S. Cotton Mill Use (1)
Completing the U.S. demand side, we see that mill use is actually running at the same pace as last year. For calendar ’04, mill use totaled 6.25 million bales. It would appear that similar number is possible for this year.
U.S. Cotton Mill Use (2)
The recently-completed ’04 marketing year shows mill use of 6.25 million bales. Looking at the current marketing year, USDA August report puts mill use at 5.8 million bales. Based on data for the recent months, that appears to be overly pessimistic. I think that 6.0 is attainable, particularly if we see continued use of safeguards or some type of textile trade agreement with China.
Foreign Cotton Production and Use
Outside of the U.S., estimates suggest that production falls from last year while consumption is continues to grow. USDA puts foreign mill use at 106.2 million bales, up more than 4 million bales from last year. For the foreign crop, 88.5 million bales are expected, down 8 from last year.
These estimates indicate a deficit between 17 and 18 million bales, substantially larger than last year, and have direct implications for U.S. exports.
At this point, one of the big questions is whether this crop has the potential to get larger.
Change in ’05 Production
Looking at country-specific estimates, most production areas are expected to have a smaller crop than in ’04. China accounts for 3 million of the decline, while India and Pakistan together contribute another 3 million bales.
Reports from India indicate that this year’s crop may actually be larger than last year, perhaps by 1 million bales. However, Pakistan’s crop could fall from the latest USDA estimate.
Small declines are expected in Turkey, AU, Uzbekistan, and West Africa.
Change in ’05 Mill Use
Not to sound like a broken record, but China, India and Pakistan are the focus of the demand growth. Mill use for China should top 40 million bales for the ’05 crop year.
If India’s crop turns out to be larger than last year, we could see more growth in their mill use.
World Cotton Trade (1)
On the trade side, the chart compares total world imports with the imports of the top 10 export customers of U.S. cotton. Historically, these 10 countries account for about 2/3 of world trade. They also account for between 80 and 85 percent of U.S. exports. I would add that for the past two years, the top-ten list has been the same.
Imports, in total, and by these 10 countries are expected to expand in 2005, reaching 38 million and 27 million, respectively. The expansion is primarily due to an expected increase in imports by China.
World Cotton Trade (2)
Adding U.S. exports to the picture, we are coming off a year when we exported 14 million bales, a new record. Estimates for 05/06 approach 15 million bales. It’s a big number, but it does appear to be a number that is attainable. In fact, to hit 15 million bales would actually show a loss in market share relative to 2004.
U.S. Cotton Ending Stocks
With a U.S. crop between 21 and 22 million bales, mill use of 6 million bales, and exports of 15 million bales, stocks would build further by the end of the current marketing year.
It certainly looks as if 7 million bales are possible, up from 6.5 at the end of the 04/05 marketing year.
World Cotton Ending Stocks
For world ending stocks, we are finishing 04/05 with just over 50 million bales of cotton. It looks as production will be roughly in line with consumption, leaving little change in global stocks over the next year.
“A” (FE) Index & Nearby Futures
Cotton prices have moved in a sideways pattern for the past year as last year’s large crop continues to weigh on the market. Unless there is a significant surprise in the crop, then upside seems limited.
Summary
In summary, the crop will be smaller than last year, but not by as much as originally thought. Demand still looks relatively optimistic. Demand is boosted by prices being weaker relative to polyester. China is the wildcard. Specifically, what will be their purchases and at what timing? Stocks continue to hang over the market.
