Declining U.S. cotton acreage should send a message to those countries in the World Trade Organization criticizing the U.S. cotton program – U.S. cotton producers do indeed respond to market signals.
Just look at prices and world production numbers last year, says Gary Adams, vice president, economic policy development, National Cotton Council, speaking at the 2008 Beltwide Cotton Conferences in Nashville.
“From the mid-point of 2004 to the mid-point of 2007, cotton prices for the A-Index and the nearby New York futures contract generally moved between 50 cents and 60 cents. Late in the summer, we saw an increase in prices, with futures moving into the low- to mid-60s and the A-Index move into the 70-cent range. We’ve continued to see some strength recently.”
Despite lower world prices prior to the 2007 planting season, estimated world production for 2007 wound up at a very high 119 million bales. China was largest producer at around 35 million bales, or roughly 30 percent of world production.
India ranked second in production, with a crop estimated at 24 million bales, surpassing the United States’ 19 million bales. The top two producers, India and China, accounted for 50 percent of world production, “so they are markets that we have to pay attention to.”
Pakistan and Brazil rounded out the top five producers in the world at 8.5 million bales and 7 million bales. All five of these countries account for roughly 80 percent of world production.
But only one of these countries responded in any significant way to market forces in 2007 – the United States. “There was a huge shift in U.S. acreage in 2007, with declines all across the Cotton Belt, to about 10.8 million acres. Regionally, the largest reductions of 32 percent and 35 percent were in the Mid-South and Southeast.”
Meanwhile, for countries outside the United States, acreage in 2007 was either flat or increased from 2006. Noted Adams, “We continue to hear the criticisms about the U.S. cotton programs, and this undermines one of the criticisms they make about the unresponsiveness of U.S. acreage, or that we are isolated from market signals.
“This begs the question of why we are not seeing some adjustments in other countries. China’s internal price situation is not always reflective of what is happening in an international market. In India, they don’t have the same competing crops that we see in the United States. And their improved yields continue to increase profitability.”
Adams expressed some concern about whether demand will slow down in light of recent prices increases for cotton. “From 2004 to 2006, world mill use grew by an average rate of about 8 million bales per year. If you compare that to the growth of the last 30 or 40 years, that was a 3-year stretch of unprecedented growth in global mill use.”
For the 2007 marketing year, USDA has mill use expanding at a slightly slower pace, but still at a relatively high 5 million bales. “We’re already halfway through this marketing year, and the big question is whether we can continue to sustain that level of demand growth at this current price level.”
Drivers that come into play for mill use will be dependent on the price relationships between polyester, cotton and yarn. “When we had strong growth in mill use between 2004 and 2006, those prices were fairly close together. With this last increase in cotton prices, we’ve seen cotton prices move out ahead. That’s one of the things we have to watch when we talk about demand. It is encouraging that we are seeing some improvement in polyester prices, but a concern is still going to be the ability to pass along those higher cotton costs by way of higher yarn costs. It puts a squeeze on the bottom line in returns for the textile mill.”
The big buyer of U.S. raw cotton is now China, where mill use for the 2007 marketing year is estimated at 55 million bales. “With China, you always have to be a little skeptical of the data. But what is clear is that mill use in China has been growing and should continue to expand. We will continue to see investment in textile spinning machinery.
“Once we get to the end of 2008, then constraints on about 30 textile categories covering products from China into the United States will be going away. So it offers China greater access to the U.S. retail market in 2009. Both those factors, along with increased investment, should allow their mill use to continue to expand. They do face challenges in rising energy costs and tighter access to credit, which might slow that growth.”
While China is a significant user of U.S. cotton, “that’s not to say we don’t have some concerns about China’s import quotas,” Adams said. “Quotas are required for textile companies to import into China. When China acceded to the WTO, they agreed to a basic quota of about 4 million bales with a nominal tariff of about 1 percent. But any imports above that level have a variable tariff ranging between 5 percent and 40 percent.
“The net effect is to make cotton more expensive as it comes into China. It serves to guarantee domestic prices in China ranging from 75 cents to 80 cents per pound regardless of where world prices are. That tends to reduce competitiveness with man-made fiber, stimulates internal production and acts as a restriction on imports of cotton. It’s an issue of market access that we’re trying to resolve.”
The United States is still the No. 1 retail market for cotton textile apparel products, using between 23 million and 24 million bale equivalents annually, according to Adams. “That comes down to roughly 38 pounds per person, by far the most on a per capita basis. Unfortunately, we continue to see more and more of the U.S retail market being supplied by imported textile products.”
The resulting weakening in domestic mill demand “has left us increasingly reliant on exports for U.S. cotton, which brings its own set of challenges to deliver cotton in a timely and competitive manner. It also brings some greater volatility in terms of overall demand levels and prices.”
Adams looks for further tightening of cotton supply in 2008-09. “Clearly the fundamentals remain supportive of cotton prices. The December 2008 contract is now moving into the upper 70s and some of the 2009 contracts have moved into the low 80s.
“The supply side of the market is supportive of the market. The wild card we have to watch is the demand side. In the face of higher energy costs taking more of the consumers’ disposable income, and with the uncertainty of world economic performance, the ability to maintain demand is going to be key.”