Is the U.S. cotton industry beginning to see the light at the end of the tunnel? Or is that the light of an oncoming freight train?
Although cotton prices have been nothing to get excited about this winter, some analysts, including the International Cotton Advisory Committee's Terry Townsend, believe cotton's dismal outlook of recent years may be brightening.
“The 1990s was a lost decade for the world industry, but this decade will be one of growth,” said Townsend, speaking at the Beltwide Cotton Production Conference in January.
A former economist with USDA, Townsend says that cotton consumption is rising with much of the growth occurring in the Commonwealth of Independent States (former Soviet republics) and in Mainland China. Analysts predict China's consumption will rise to 22 million bales in 2000-2001 after holding steady at 21 million in recent years.
The ICAC, an association of 43 governments of countries with an interest in cotton, forecasts total world cotton consumption will rise by less than 1 percent in 2000-2001 and in 2001-2002 to 92 million bales.
“The 1990s was a lost decade for the world industry.”
But, the change in China's cotton consumption pattern could portend better days for world cotton sales, says Townsend.
“The important thing is that even though the rate of growth is lower than for chemical fibers, cotton consumption is rising again after a decade of stagnation around 85 million bales,” he noted.
Two factors caused the stagnation: the breakup of the USSR in 1991 and government policy in China. The former resulted in the subtraction of about 9 million bales from world consumption while the latter appears to have led to conscious decision to limit cotton consumption to about 21 million bales.
“Consequently, consumption outside the former Soviet Union, Central Europe and China needed to rise by 9 million bales in the 1990s just to keep the world steady,” he said. “However, both situations are improving. Mill use is rising in the CIS and China's is estimated at 22 million bales, possibly reflecting a change in government policy.”
Townsend said China's consumption appears to be rising at an unusually steep rate because of the internal situation in China. In 1999, the government announced it was reducing its price guarantee to cut stocks and lower procurement costs.
China's cotton yarn production is estimated at 1.8 million tons for the three months of August through October 2000, compared with 1.5 million tons during the same first three months of the marketing year in 1999.
“Even assuming that the proportion of chemical fiber in cotton yarn is rising from 36 percent last season to 37 percent this season, mill use of cotton in China is rising from 20 million to 21 million bales,” he notes. “Adding about 2 million bales for use in all non-mill categories results in a use estimate of 23 million bales in 2000-2001.”
China's 2000-2001 production, meanwhile, is forecast at 20 million bales, leaving a possible deficit of 3 million bales. As a result, observers like cotton merchant William B. Dunavant Jr. say China could come into the market for a significant amount of cotton in December of 2001 or January or February of 2002.
It's nothing new for China's potential purchases to create excitement in the U.S. market, says Townsend.
“Over the last two decades, no other factor on the cotton supply and use balance sheet has had as much of an impact on year-to-year changes in average cotton prices as changes in net trade by China,” he said. “The forecast rise in imports by China to more than 2 million bales by next season is driving the forecast of next year's average A Index higher.”
Clouding the outlook is the recent forecast by the country's National Statistics Bureau that China will produce a crop of 19.98 million 480-pound bales in the 2000 season. Most western analyst-shave put the number around 18.5 million bales.
Analysts also are predicting that 2001 U.S. cotton plantings will be about the same as 2000 to slightly higher despite the failure of New York December futures to rise out of the low 60-cent range. With improved weather, economists say the United States could produce a crop as high as 19.5 million bales in 2001 versus 2001's 17.2 million.
In either case, the result could be higher stocks in China or the United States and lower average prices than farmers received in 2000.
In his annual market insight speech at the Beltwide, Dunavant discounted the report by the Chinese statistics agency.
“I speculate that since the Chinese National Statistics Bureau is a big political structure in China, their number has political ramifications, and it seems they are trying to keep the domestic cotton prices low to benefit the Chinese textile industry,”e said.
“Over the last two decades, no other factor on the cotton supply and use balance sheet has had as much of an impact on year-to-year changes in average cotton prices as changes in net trade by China,”
“Recently, the new crop local Chinese prices have been quite high. At best, their information from cotton roducing provinces is quite primitive.”