Cotton producers have become accustomed to having their prices whipsawed by events on the other side of the world. Now they're finding their markets impacted more by Wall Street and Main Street than Front Street.

The crisis on Wall Street has restricted credit availability while making consumers more cautious in their spending on textile and apparel and related products, according to the National Cotton Council's chief economist. (For years, Front Street was the center of Memphis' once-thriving spot cotton market.)

That waning of consumer confidence is spreading throughout the textile supply chain, forcing a decline in world mill use in China - which accounts for more than 40 percent of world cotton consumption - for the first time since 1998. The slowdown in China's growth could also lead to acreage shifts in that country.

“Markets are closely watching for signs of economic recovery and improved demand,” said Gary Adams, the NCC's vice president for economics and policy analysis. “Competition from other crops will keep pressure on world cotton area, including a possible shift from cotton to grain in China.”

Adams told participants at the Council's Beltwide Cotton Conferences in San Antonio the big question in 2009 will be the extent to which economic problems linger and the potential for recovery.

“This past year's markets will not soon be forgotten by the cotton industry,” he said. “The effects of an erratic futures market were felt throughout the industry along with sharply higher fuel and fertilizer costs for producers.

“In addition, the deteriorating financial situation and faltering economy raised doubts about the consumer's willingness and ability to buy textile and apparel products. As a result, the cotton market, along with the other commodities, exhibited a bearish tone in the second half of the year.”

The effects of the current macroeconomic situation are evident in USDA's latest mill use projections. Department analysts are predicting world cotton consumption will only reach 116.6 million bales in the marketing year that began Aug. 1, compared to 123.4 million bales in the 2007 marketing year (August-July).

It's no secret that the economy in the United States and in much of the rest of the world suffered a downturn in 2008. Recent estimates by the International Monetary Fund say calendar year 2009 could be worse than 2008 with the economies of developed countries expected to contract by three-tenths of 1 percent. (Most have grown 2 percent to 3 percent in recent years.)

“Recovery is expected in 2010, but not to recent historical levels,” says Adams. “The IMF stresses the uncertainty around the current economic climate and notes the projections are based on current policies and thus are subject to change.”

Adams notes the current projected 5.5 percent decline would be the most severe since 1974 when world mill use dropped 5.4 percent. Since 1972, there have been four years with declines greater than 2 percent.

“We are all too familiar with the dramatic shift in demand for U.S. cotton,” he said. “The U.S. textile industry has been devastated by a surge in imported textile products. As a result, the most consistent and stable customer for U.S. cotton is less than half the size of a decade ago.

“Fortunately, the losses have slowed, and the much-needed economic assistance provided in the 2008 farm bill should stabilize the industry going forward and allow the U.S. cotton industry to maintain a domestic demand base around 4 million bales.”

On the producer front, volatility continues to define the U.S. cotton market. Adams said the move from 90 cents per pound to 40 cents in the December 2008 futures contract was unprecedented.

“Competition from other crops will keep pressure on world cotton area, including in China,” he notes. “Farmers in the United States will weigh those same decisions but given the volatility in commodity prices and input prices. I don't think any decisions are set in stone at this point. Many will take a wait-and-see approach before making final planting decisions.”