Introduction - Good morning, thank you for the opportunity to address this Summit regarding the outlook for US and world cotton.
Cotton Prices - Let?s begin with a brief recap of recent price movements. During 2001, world cotton prices, as measured by Cotton Outlook?s "A" Index, showed a precipitous decline ? falling from 65 cents per pound in January ?01, down to 35 cents by November of that same year. Reasons for the decline will be covered in more detail, but in short, 2001 was a year where cotton supplies outran cotton demand.
Over the past year, we have seen a steady, although somewhat unspectacular, recovery in prices. While better than year-ago levels, prices are still below those observed during the late 1990?s.
World Cotton Supplies (a) ? First, we?ll focus on the supply side. The latest estimates by USDA put total cotton supplies for the ?02 marketing year at 136 million bales, down from 141 million last year. As you?ll see, it?s in line with levels observed over the 1997-2000 period.
World Cotton Supplies (b) ? Total supplies are comprised of old-crop cotton in storage as well as expected production from this year?s harvest. Stocks of cotton heading into the ?02 marketing year are estimated to be approximately 47 million bales. While higher than last year?s level, total beginning stocks are not that different from levels observed in 1999. However, where those stocks are held is quite different.
World Beginning Stocks ? At the start of the 1999 marketing year, we had more than 47 million bales on hand, with roughly half of the total held by China, 8% in the US and the remainder in other countries. At the start of the current marketing year, there are similar stock levels, but locations have changed. China now accounts for less than 30% of global stocks, with the US holding 16% of stocks. (Stocks ? China: 13.6, US: 7.4, India: 4.5, Pakistan: 3.3, Brazil: 2.3, Australia: 2.3, Turkey: 1.5.)
World Cotton Supplies (c) ? In their most recent estimates of world production, USDA puts this year?s crop at 88 million bales, down 10 million from 2001. Other estimates by ICAC and Cotton Outlook are closer to 89 million bales.
Change in Cotton Production ? Relative to last year, most countries are expected to see lower production. Exceptions are Paraguay, Turkey and Argentina, where USDA is calling for small increases. Australia is expected to see a significant decline of 1.2 million bales due to drought conditions. In percentage terms, this is by far the largest decline. The decline in India is due primarily to reduced acreage. The same is true for China as production is expected to fall by almost 3 million bales. It should be noted that USDA increased their estimate of the Chinese crop by 1 million bales and is still 500 thousand bales below some internal estimates.
The US will also see a smaller crop in 2002, due to both reduced acreage as well as lower yields. Latest estimates put the crop at 17.8 million bales, 2.5 below last year?s level. Of course, last year?s crop was a record level of production.
2002 US Cotton Production ? Looking at US production in a bit more detail, three of the four major production regions will harvest smaller crops than a year ago. The exception is the Southwest, where an increase of 900 thousand bales is expected. Lower abandonment of acreage and higher yields both contribute to the increase. The decline in the Far West is due to reduced area as yields are above the 2001 levels. With harvest virtually complete, we can be reasonably confident in the size of their crop.
The situation in the eastern US is less clear. Harvest is well behind the average pace due to frequent rains. In a number of states, almost half of the acres have yet to be picked. While current estimates for these states show lower production than a year ago, further revisions by USDA are likely to show an even smaller crop. I do not believe that we will see large reductions, but it could be in the order of another 300-400 thousand bales.
World Cotton Mill Use ? Shifting to the demand side, world mill use is estimated at 96.2 million bales. If realized, it would be a 2 million-bale increase from last year?s consumption. USDA?s estimate represents one of the more optimistic ones out there. Other projections are closer to 95 million bales.
World Fiber Mill Use ? World cotton demand has shown very anemic growth over the past decade. It?s not the case that total fiber demand has been lagging, it is simply the fact that competition from man-made fibers has continued to increase. In 1992, consumption of the two was roughly the same with cotton at 86 million bales and MMF at 89 million bales. Since that time, cotton has managed to reach the 95 million-bale range, while total MMF is now in the neighborhood of 140 million bales.
Textile Polyester Production ? Looking specifically at polyester, we have seen almost exponential growth in polyester production in Asia. Projections by PCI would suggest that continue into the near future. The increase in MMF production has and will continue to have a significant impact on the world cotton market by reducing cotton demand and leader to downward price pressure.
Change in Cotton Mill Use ? Going back to cotton mill use, USDA?s projected growth for 2002 is due primarily to China. As we look at these numbers, we need to ask a couple of questions. While it?s clear that textile production is growing rapidly in China, will cotton capture this much of the growth? If consumption in China does increase by 1.2 million bales, will global demand increase enough to sustain modest expansion in other countries?
In the US, the latest numbers suggest almost no change in mill use relative to last year.
US Cotton Mill Use ? Since 1997, US mill use has shrunk from 11 million bales down to less than 8 million. There are indications from recent numbers that mill use has stabilized, and projections for 2002 are unchanged from the 2001 level. We can spend a few minutes looking at the reasons behind the decline and implications for the US?s role in world cotton markets.
US Real GDP Growth ? First, we have seen a US economy that has endured a recession in 2001 and has been fairly sluggish through much of this year. This is certainly an underlying factor in the decline in overall domestic consumption of textile and apparel that was observed last year.
Real Exchange Rate Indices ? Over the last several years, we have seen a steady strengthening of the US dollar. Whether measured against major currencies, predominantly the yen and the Euro, or against Other Important Trading Partners, dominated by Asian and Western Hemisphere countries, the dollar strengthened by 20% since 1997. This has made imports of textiles and apparel even more attractive. While there has been some weakening against the major currencies, it has continued to remain strong against the OITP.
Cotton textile imports into the US have doubled in the last 10 years, going from 8 million bales up to 16 million. Based on data through July, it appears imports will top 16 million bales this year. In the past couple of years, we have seen such a surge from China that imports from NAFTA countries have declined. Future trade agreements and the elimination of quotas in 2005 would suggest imports continue to increase. The question may be how quickly imports grow and that will hinge to a certain extent on the strength of the dollar.
US Cotton Mill Use and Supply ? The developments in US mill use have led to wider gap between domestic supplies ? production plus beginning stocks ? and domestic use. In 1998, that gap was about 7 million bales. In 2001, it topped 18 million bales and will be only slightly smaller for this marketing year.
US Cotton Textile and Apparel Imports ?US Cotton Mill Use, Supply & Exports ? Putting this together, what does it mean for US exports of cotton? The wider gap leaves larger exportable supplies in the US. We certainly saw that this past year as US exports grew to 11 million bales. The current marketing year is set up for a very similar situation as exports are again expected to approach 11 million bales.
Summary ? In summary, we are looking at lower cotton production in 2002. However, after taking into account beginning stocks, there will still be relatively large supplies. Consumption will exceed production, leading to a decline in stocks as we move through next year. Looking ahead to 2003, I would expect little change in acreage from this year?s level. Following the recent yield trend would give a crop between 92 and 94 million bales. If that prevails, current consumption estimates would lead to a further reduction in stocks.
That concludes my remarks on the outlook and once again, thank you for the opportunity to address the summit.
