China, Economy, Weather Key Factors in Cotton’s 2012 Outlook

MEMPHIS – National Cotton Council economists say cotton's 2012 outlook will be influenced primarily by China's national reserves stocks, uncertainty over the general economy and weather developments in the southwestern United States.

Dr. Gary Adams, the NCC's vice president Economics & Policy Analysis, told delegates at the NCC's 74th Annual Meeting in Fort Worth today that 2012 is not starting out as a normal year for the U.S. Cotton Belt's southwest region, particularly Texas and Oklahoma. He said drought conditions persist, and as a result, for those two states, the outlook assumes above normal abandonment and yields below trend.

Adams said the NCC sees a 2012 U.S. cotton crop of 18.30 million bales, with 17.51 million upland bales and 783,000 extra-long staple (ELS) bales. When combined with international 2012 production of 101.1 million bales, the world crop for 2012 is estimated at 119.4 million bales.

Regarding 2012 U.S. offtake, the NCC sees exports expanding to 12.9 million bales and mills consuming 3.5 million bales versus the current marketing year's 3.4 million bales.

The NCC sees 2012 world mill use of 113.8 million bales, an increase of 3.5 percent from 2011, but Adams said, "growth of this magnitude will only be achieved with competitive pricing and a rebuilding of the textile pipeline."

He also said that barring some major production problems – which is still a possibility given La Nina – global production is projected to exceed consumption and allow world ending stocks to build to 64.1 million bales.

"While that is a level comparable to 2006-09, it is important to remember that as much as 30 percent of those stocks could be held in China's government reserves," Adams said. "By late January, more than 11 million bales have been purchased into the China reserve, with some speculating that total purchases could exceed 15 million bales."

Adams noted that while China's reserves policy is providing short-term support to the cotton market, China's implementation of this policy "is the single largest wildcard in the cotton market." Regarding prices, he also noted that though the forecasted stocks/use relationship is likely to dampen upside price potential, current polyester prices and cotton's need to remain competitive with grains are supportive of prices on the downside.

For the 2012 marketing year, Adams said the strength of cotton demand will hinge on the global economy's overall health and be dependent on cotton prices that are less volatile and more competitive with polyester than what was observed in 2011. He said today's "A" Index of approximately $1.00 is substantially lower than year-ago levels of $1.70 – with the result that international cotton area is estimated to decline by about five percent. In the United States, the NCC's annual early season planting intentions survey found U.S. all-cotton plantings in 2012 of 13.6 million acres, down 7.5 percent from 2011.

Regarding the global economy, the NCC's outlook notes that global prospects have taken a pessimistic turn relative to views held six months earlier. The consensus of recent forecasts calls for the world economy to expand by 3-3.5 percent in 2012 and by another 4 percent in 2013.

"However, economists are quick to note the potential for significant downside risks, with much of the concern based on the continuing debt crisis in Europe," Adams said. "Assuming the financial crisis in the Eurozone remains fairly well contained, global economic recovery should provide a climate for modest cotton demand growth. However, demand growth will increasingly be driven by consumers in developing economies. In those markets, demand for cotton textiles and apparel will be very sensitive to relative prices of cotton and polyester."

Adams concluded by reminding delegates about the sharp price swings in 2011.

"That type of volatility did not serve the interests of any industry segment," he said. "Few growers had cotton to sell at those very high prices. Some textile mills were caught up in a wave of panic buying without corresponding yarn orders. Also, cotton merchandisers were caught up in the fallout from the dramatic price swings as sales cancellations and arbitrations sharply increased."

Additional details of the 2012 Cotton Economic Outlook are on the NCC's website at http://www.cotton.org/econ/reports/annual-outlook.cfm.