Cotton's Week: July 16, 2004

NCC Chairman Woody Anderson continued to "set the record straight" regarding the Brazil/WTO dispute case telling 3 industry groups the United States will file an aggressive appeal in the Brazil WTO case and that he is "tired of seeing poor economics casting blame on the US cotton program and ignoring reality."

In remarks to the Texas Agricultural Co-op Council, the Texas Independent Ginners Assoc. and to the New Mexico Cotton Ginners Assoc., he said “these are very critical times for our industry. I assure you that the National Cotton Council will continue its efforts on your behalf. We will work with the US government and press this appeal. The correct outcome seems clear to us.”

Anderson cited recent reports by the USDA and the International Cotton Advisory Committee (ICAC) showing that US cotton production is declining while production outside the United States is skyrocketing. He said these facts undermine claims that the United States is causing Brazil serious prejudice.

"Current expectations indicate Brazil’s cotton crop is now 85% larger than their 2001 crop,” Anderson said. “It seems incredible that Brazil could argue it is being harmed in world markets, given that kind of production increase.”

Anderson also disputed claims that the US program has significantly affected world cotton prices. He cited a recent Texas Tech U. analysis that determined the US cotton program does not impact world cotton prices by any more than 2%.

"This is not a significant impact," Anderson stated. "I am not apologizing for the US cotton program. It is well-designed, well-crafted and an important component of the agricultural policy of the United States. Our program was designed to comply with our WTO obligations.  Our program does not have significant impacts on world markets. The Texas Tech study and several others confirm this."

NCC Vice President of Economics and Policy Analysis Dr. Gary Adams shared similar information at the Southern-Southeastern Mid-Year Board Meeting in Arlington, VA. In highlighting recent trends in production and use in world cotton markets, Adams said an expected global cotton production increase - outside of the United States - has pushed down world prices and will exacerbate the economic stress being felt by cotton producers.

“Based on current expectations, this year’s world cotton crop will be significantly above the previous record of 98.5 million bales set in 2001,” Adams said.

He said recent reports from the USDA and the International Cotton Advisory Committee (ICAC) project a record world cotton crop for ’04. ICAC puts the global crop at 102.0 million bales in ’04 - a 9% increase over ’03, while USDA puts the crop at 104.7 million bales - with a large part of this increase attributable to China.

 "I have read with interest recent reports that target the US cotton program as being responsible for suppressed world market prices,” Adams said. “I can't help but question the basis of that analysis. The market we are seeing unfold right now shows very clearly that as China goes, so go world markets. It also demonstrates that Brazil has tremendous potential to increase cotton production. Combined, Brazil and China's production increase since 2001 is almost twice that of the annual production of West Africa, leaving little room for any real strengthening in world market prices. Also, since 2001, US production has fallen by more than 2 million bales."

The economist pointed out that while the US cotton crop is expected to drop from ’03, production outside the United States will increase substantially. In fact, outside the United States, USDA estimates that cotton acreage will be at its highest level since ’91.

"The recent movements in the world cotton market send a very clear signal,” Adams said.  “Should world cotton prices even modestly strengthen, we can expect expansion in cotton production in China and Brazil." 

Adams says that as the largest producer and spinner of raw cotton, China is the dominant factor in the world market affecting cotton prices. His analysis is supported by the ICAC report which concluded that 65% of the increase is expected to occur in China (Mainland), with production climbing to 28.0 million bales, the second largest crop after ’84/85. USDA puts China’s crop at 30 million bales. The ICAC report also stated that China's share of world mill use is expected to reach 34% in ’04/05, the highest level since the mid-’70s.

The House overwhelmingly approved (389-31) the $16.77 billion FY05 agriculture appropriations bill (HR 4766) after rejecting an amendment to cut funding for the Market Access Program (MAP). The bill, which funds the USDA, the Food and Drug Administration and the Commodities Futures Trading Commission, provides slightly less funding than the FY04 bill and slightly more than the President requested.

During the debate, the House approved an amendment to increase funding for the Farm Services Agency (FSA) salaries and expense account by $52.8 million; increase Natural Resource Conservation Service (NRCS) conservation operations funding by $40.4 million and Rural Development funding by $27.6 million over the Committee’s approved level.

The bill includes $47 million for boll weevil eradication and $2.1 million for pink bollworm eradication. The legislation authorizes FSA to make up to $100 million in loans available to carry out boll weevil or pink bollworm eradication programs.

The Senate has not yet scheduled a markup of its agriculture appropriations bill.

Producers in selected watersheds have until July 30 to complete the ’04 sign up for the Conservation Security Program (CSP) – the first sign up since the program was created in the ’02 farm law.

Producers in selected watersheds first fill out a self-assessment, which can be completed online at http://www.nrcs.usda.gov/programs/csp. CD and paper copies also are available at NRCS offices.

The initial self-assessment will help producers identify whether their individual agricultural operation meets sign-up criteria. By going through the workbook, producers will get a good idea about whether they are eligible for CSP at this time. Producers who may not be eligible can find out about programs that can help them achieve a higher level of conservation so that they may apply for CSP in the future.

The House easily approved legislation (HR 4759) to implement the Australian Free Trade Agreement. The legislation passed by a vote of 314-109 with broad bipartisan support.

The Senate Finance Committee, acting on the same day, voted to favorably report the implementing legislation to the Senate on a vote of 17-4. Subsequently, the full Senate voted 80-16 in favor of the legislation (S 2610). The House and Senate action clears the measure for the President’s signature.

In its July report, USDA projected the ’04-05 US cotton crop to reach 18.00 million bales, up 400,000 bales from the June report. US mill use and exports are projected to reach 5.80 and 11.30 million bales, respectively for total ’04-05 offtake of 17.10 million bales. Ending stocks for ’04-05 are projected at 4.50 million bales, for an ending stocks-to-use ratio of 26.3%.

USDA gauged US ’03-04 cotton production at 18.26 million bales. Projected mill use and exports were unchanged from the June report at 6.30 and 13.80 million bales, respectively. As a result, projected total offtake remained the same at 20.10 million bales. This generates an ending stock value of 3.60 million bales. The estimated stocks-to-use ratio is 17.9%.

In USDA’s July report, expected ’03-04 world production estimates were raised 430,000 bales to 93.89 million. USDA increased the estimate of beginning stocks to 36.65 million. This results in a world supply of 130.54 million bales. Estimated world mill use was lowered 220,000 bales to 98.39 million. The projected world ending stocks on July 31, ’04 is now pegged at 32.93 million bales. This has a corresponding stocks-to-use ratio of 33.5%.

For the ’04-05 marketing year, USDA projected world production of 104.73, up 1.85 million bales from the June report. World mill use was raised 300,000 bales from the June report to a projected 100.16 million bales. Consequently, world ending stocks for ’04-05 are projected to be 37.79 million bales, for a stocks-to-use ratio of 37.7%.

Net export sales for the week ending July 8 were 192,300 bales (480-lb.), resulting in total ’03-04 sales of more than 14.9 million. Total sales at the same point in the ’02-03 marketing year were approximately 13.0 million bales.

Cotlook Ltd., a Liverpool-based independent publisher of international cotton news and prices, announced that beginning Aug. 1, the Cotlook A Index, widely regarded as the barometer of world cotton prices, will reflect C/F Far East values, rather than CIF North Europe. 

Cotlook has published a Far Eastern (FE) Index since ’03 to reflect the change in patterns of world trade since China’s entry into the WTO. The FE Index operates in a similar manner to the A Index apart from its treatment of African Franc Zone components and has, to date, typically shown a modest discount to the established North European A Index.

Cotlook now intends that the new value, from Aug. 1, will be the principal barometer it uses to measure world prices. Therefore, the ‘A Index’ will represent Far Eastern values. This action does not mean that calculation of the European values will be discontinued. The 2 previous Indices will, from Aug. 1, be denoted as the A (NE) and the B (NE), and they will continue to be published, in a revised format, in all of Cotlook’s daily and weekly services.

Because both European values will continue to be published, USDA will continue to calculate the cotton marketing loan provisions in the same manner.