Abstract
In 1997, the U.S. textile industry consumed 11.3 million bales, or 60 percent of the cotton crop. In that same year, exports stood at 7.5 million bales. For the current marketing year, we’re on pace to export more than 16 million bales of raw fiber – roughly 70 percent of this year’s crop – with mill use at approximately 6 million bales. China is on pace to be the largest consumer of U.S. cotton. It is likely that the U.S. will sell China 7 to 8 million bales of this year’s crop. Globally, manmade fiber use totals 180 million bales, compared to 115 million bales of cotton. As we look at challenges facing the global cotton market, the ability to increase demand and regain market share relative to manmade fibers is paramount.
Introduction
We are well aware of the recent shift in the demand base of U.S. cotton. In 1997, the U.S. textile industry consumed 11.3 million bales, or 60 percent of the cotton crop. In that same year, exports stood at 7.5 million bales. Since that time, we’ve seen the roles more than reverse themselves. For the current marketing year, we’re on pace to export more than 16 million bales of raw fiber – roughly 70 percent of this year’s crop – with mill use at approximately 6 million bales.
It’s also important to remember that trade occurs at more than just the raw-fiber level. The health of our textile sector is directly influenced by trade in cotton textile and apparel products. Much of the decline in the U.S. textile industry is the direct result of increased textile imports – primarily from Asia. Since 1995, imports of cotton textiles have roughly tripled, going from the equivalent of 8.4 million bales up to an estimated 22 million bales in 2005. While the increased imports have been to the detriment of the U.S. textile industry, a significant portion of our current textile industry is supported by the ability to export textile products, mostly yarn, thread and fabric.
Decomposing mill use, we see that 5 million bales of the yarn, thread and fabric produced by our textile industry are exported to other countries, primarily in this hemisphere, for further processing. That leaves only a small amount that is completely manufactured into a finished consumer product within the United States. Adding up fiber exports and textile exports suggests that 90-plus percent of the U.S. cotton crop enters export channels at some stage.
Whether at the fiber level or the textile level, exports are important, and the economic health of the U.S. cotton and textile industry is directly tied to developments in other cotton-producing and -consuming countries. In short, we are competing in a global market, and we are directly impacted by what happens in that market.
The Global Market
From 1995 through 2003, world cotton production and consumption ranged between 85 and 100 million bales, and we generally traded between 25 and 30 million bales. In the last two years, it appears that we’ve moved to a new level. The record-crop of 120 million bales in 2004 is being followed by another large crop between 110 and 115 million bales. Consumption has also jumped and is estimated at 115 million bales for the current marketing year. Likewise, there has been an increase in the amount of cotton traded, and as we will see, much of that is due to China.
The data for 2004 and 2005 raises several questions about the future. Is this “bigger” market a new plateau or a spike? Can the United States continue to find a home for 15 million bales in the export market? If so, who will be the customers? To help answer those questions, let’s look at some key players in the world market.
Mexico
Starting in the Western Hemisphere, Mexico would not be considered a major player based on the overall share of world production and consumption, with less than 2 percent and 1 percent, respectively. However, since the North American Free Trade Agreement (NAFTA), they are a major customer of U.S. cotton. They are currently our second or third largest export customer, buying about 1.8 million bales of U.S. cotton per year. It is also the case that much of the cotton they purchase is eventually returned to the U.S. retail market as apparel or textiles.
The concern for Mexico’s textile industry is much the same as the U.S. – that is competition from Asian textile products. Mexico continues to lose share of the U.S retail market to China, and as a result, their mill use has been flat to slightly declining. The recent textile import agreement between the U.S. and China may slow further declines between now and 2008, but expect this market to remain under pressure longer term.
Brazil
Staying in the Western Hemisphere, a country with the potential to expand its presence in the world cotton market is Brazil. We have all heard of, and some of you have had the opportunity to see firsthand, the tremendous potential to expand production. Some estimates suggest that Brazil could bring 250 million acres of new land into crop production – that’s roughly equivalent to what the United States has in production of the major row crops. Also, the new areas coming into cotton production are high-yielding. It’s clear that expansion of agricultural production is a priority for Brazil’s government, as evidenced by the recent increases in government support. A recent USDA report estimates that $13 billion in government support is now provided through credit and investment programs.
Brazil’s per-pound costs of production have traditionally been one of the lowest, but the recent strengthening of their currency has increased the costs of imported inputs and also reduced their competitiveness in world markets. Current expectations call for a drop in both production and exports in the short term. However, longer term, Brazil still must be viewed as a country with the potential to increase production and exports, assuming they address some long-standing transportation issues.
West Africa
The cotton-producing countries in West Africa, mostly former colonies of France, have gained increased attention, primarily due to their role in bringing cotton front and center at the World Trade Organization (WTO). Together, these countries account for only 4 percent of world cotton production. With little in the way of a textile industry, roughly 90 percent of their crop is exported as raw fiber, so they are a more significant player in the overall trade picture.
We are well aware of their claims of economic injury caused by the presence of the U.S. cotton program. However, their potential for growth is not determined by the U.S. cotton program, but instead, it will depend on whether or not they can address a number of internal issues related to their production, ginning and distribution systems. While time does permit not a complete examination of these issues, we can look at their recent yield experiences to get a sense of some of the challenges facing West African growers.
During the past decade, average yields in West Africa have remained flat, while the average across all other countries has increased by 150 pounds per acre. Or to look at it another way, at a world price of 60 cents per pound, an average acre of cotton outside of West Africa would generate $90 more in revenue due to yield growth (150 pounds times $0.60) over the past decade as compared to no change in the revenue from an acre in West Africa. Looking forward, West Africa’s potential growth depends on correcting the imbalances that harm their competitive position.
Western Europe
Although the European Union’s agricultural policy offers the highest per-pound support of all cotton-producing countries, they account for only 2 percent of world production. Also, much like our own textile industry, their industry has suffered from an influx of imported textile products. As a result, mill use in Western Europe has fallen from 6 down to 3 million bales.
However, the concern for all cotton producers is the unrealized retail demand potential from a high-income population base. Per-capita purchases of cotton apparel and textile products in Western Europe lag that of U.S. consumers by 22 pounds. With a population of almost 400 million, each additional pound of cotton consumption equates to another 800 thousand bales of demand.
India
Moving to the east, India is poised for growth both in cotton demand and cotton production. They have the second fastest growing economy after China, and given their current population growth, they are expected to overtake China in the coming decades as the most populous country. With more than 16 million bales of mill use, they are the second largest spinner, and generally considered to be well-positioned to prosper in the post-textile quota environment.
With almost 22 million acres harvested, India devotes more area to cotton production than any other country. However, their production potential depends on their ability to improve yields. Prior to 2003, yields averaged below 300 pounds per acre – less than half the level of other countries. Since then, we’ve seen a 100-pound improvement in yields. In part, the improved yields are due to the adoption of improved hybrid varieties and the introduction of Bt varieties. In 2005, an estimated 4 million acres were planted to Bt cotton.
Looking forward, further yield improvements could allow domestic production to expand at a quicker pace than mill use, leaving India as a net exporter of fiber.
China
Finally, we have to talk about China. They are the largest cotton producer with about 25 million bales, and were as high as 29 million in 2004. They are the largest spinner at 43 million bales, and consequently, they have emerged as the largest importer with potential purchases of 16 million bales in the current marketing year. Also, China, with purchases of 5 million bales in the first five months of this marketing year, is on pace to be the largest consumer of U.S. cotton. It is likely that the U.S. will sell China7 to 8 million bales of the 2005 crop.
However, there are still issues with access to China’s market. A continuing concern is their allocation of a portion of their quota based on the condition of export of the textile product. In addition, China imposes a variable levy on all imports above the initial quota of 4 million bales, in effect raising the cotton price relative to manmade fibers.
Unfortunately, China, which is home to 1.3 billion people, has shown little growth in their own retail market for cotton products. The growth in mill demand is clearly driven by their ability to sell textile products in other markets. This remains a concern of not only the U.S. textile industry, but also textile industries in most developing countries. Their retail cotton consumption is estimated at roughly 18 million bales. On a per-capita basis, that amounts to just over 6 pounds per person. Meanwhile, manmade fiber consumption stands at 14 pounds per person, having tripled over the past decade. If cotton had simply maintained its market share relative to manmade fibers, it would mean an additional 12 million bales of consumption.
Globally, manmade fiber use totals 180 million bales. As we look at challenges facing the global cotton market, the ability to increase demand and regain market share relative to manmade fibers is paramount.
Conclusion
To conclude, the balance between exportable supplies and import demand will be key to movements in market prices. As overall demand for US production relies more heavily on exports, we can be in a situation of increased volatility. Year-to-year volatility will depend on weather and a number of external factors around the world.
The shift to the export market has real implications for our storage and distribution system. Instead of the majority of the crop moving to textile mills in the southeast in a somewhat orderly manner throughout the marketing year, we now have most of the cotton going to ports such as Long Beach, Savannah, or Galveston. And as we’ve seen, those shipments can come in bunches.
Ultimately, we are competing in a very competitive world market. Our success depends on a number of factors. Some of those are external. A weak dollar, strong foreign economic growth and more open markets should boost exports and prices. Weather problems outside the US wouldn’t hurt either.
In terms of factors under the producer’s control, if we are talking about commodity production, minimizing cost is the key. The alternative to commodity production is to differentiate our product from other products. That’s not only continuing to improve quality, but maintaining that quality as the product moves from the grower to the final buyer. Advertising and promoting our products are essential. Cotton has seen the success and benefits of not only supplying a quality product, but promoting it as well, and these will be critical to our future success.
