COTTON: WORLD MARKETS AND TRADE April 1997 This report provides the text and analysis from the current COTTON: WORLD MARKETS AND TRADE publication. This report draws on information from USDA's global network of agricultural attaches and counselors, official statistics of foreign governments, other foreign source materials, and results of office analysis. Estimates of U.S. acreage, yield and production are from the USDA Agricultural Statistics Board, except where noted. This report is based on unrounded data; numbers may not add to totals because of rounding. The report reflects official USDA estimates released in the World Agricultural Supply Estimates (WASDE number 325, April 11, 1997.) The report was prepared by the Cotton, Oilseeds, Tobacco and Seeds Division, FAS, AGBOX 1051, 14th and Independence Ave., Washington, DC 20250-1000. Further information may be obtained by writing to the division, or by calling (202) 720-9516, or by FAX (202) 690-1171. The next issue of the Cotton circular will be available electronically after 3:30 pm local time on May 13, 1997. Further Information Contact: U.S. Department of Agriculture Foreign Agricultural Service Cotton, Oilseeds, Tobacco, and Seeds Division Stop 1051 1400 Independence Ave. SW Washington, D.C. 20250-1051 Telephone -- (202) 720-9516 Fax -- (202) 690-1171 Lynn Abbott, Acting Director Lana Bennett, Deputy Director, Analysis Abdullah A. Saleh, Group Leader, Cotton, Tobacco, and Seeds Analysis Principal Contributors Anita Regmi Cotton Analyst for Asia, Latin America & Oceania Jon Ann Flemings Cotton Analyst for Africa, FSU, Middle East & Europe Ada Arrington Electronic Word Processor Ron Roberson Chairperson for Foreign Area and Production, PECAD The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs and marital or familial status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) 720-2791 (voice) or (202) 720-7808 (TDD). To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, D.C., 20250, or call (1-800) 245-6340 (voice) or (202) 720-1127 (TDD). USDA is an equal employment opportunity employer. Summary World cotton production for MY 1996/97 is forecast at 88.1 million bales, up 1.8 million bales from last month's forecast. U.S. cotton production is forecast at 19.0 million bales, unchanged from last month's forecast. World cotton production for MY 1995/96 is estimated at 92.2 million bales, unchanged from last month's estimate. U.S. cotton production in 1995/96 totaled 17.9 million bales. World cotton consumption for MY 1996/97 is forecast at 86.6 million bales, up 335,000 bales from last month's forecast. U.S. consumption is forecast at 11.0 million bales, unchanged from last month's forecast. World cotton consumption for MY 1995/96 is estimated at 85.4 million bales, up 40,000 bales from last month's estimate. U.S. cotton consumption in 1995/96 totaled 10.6 million bales. World cotton exports for MY 1996/97 are forecast at 26.8 million bales, down 340,000 bales from last month's forecast. U.S. exports are forecast at 7.0 million bales, up 200,000 bales from last month's forecast. World cotton exports for MY 1995/96 are estimated at 27.4 million bales, basically unchanged from last month's estimate. U.S. exports in 1995/96 totaled 7.7 million bales. World cotton ending stocks for MY 1996/97 are forecast at 37.8 million bales, up 1.8 million bales from last month's forecast. U.S. ending stocks are forecast at 4.0 million bales, down 200,000 bales from last month's forecast. World cotton ending stocks for MY 1995/96 are estimated at 35.7 million bales, up 61,000 bales from last month's estimate. U.S. ending stocks totaled 2.6 million bales.World Situation World cotton production for MY 1996/97 is forecast at 88.1 million bales, up 1.8 million bales from last month's estimate. Major adjustments include the following: - China's production was increased by 1.8 million bales due to preliminary production estimates by China's State Statistical Bureau. - Pakistan's production was increased by 100,000 bales due to higher yield. World cotton production for MY 1995/96 is estimated at 92.2 million bales, basically unchanged from last month's estimate. World cotton consumption for MY 1996/97 is forecast at 86.6 million bales, up 335,000 from last month's forecast. Increases in the consumption forecasts for China, Pakistan, and Taiwan more than offset decreases in the consumption forecast for Korea. World cotton consumption for MY 1995/96 is estimated at 85.4 million bales, up 40,000 bales from last month's estimate, mainly due to a 36,000 bale increase in Indonesia's consumption estimate. World cotton exports for MY 1996/97 are forecast at 26.8 million bales, basically unchanged from last month's forecast. The increase in the export forecast for the United States was more than offset by the decreases in the export forecasts for Pakistan, Egypt, Hong Kong, and other countries. World cotton exports for MY 1995/96 are estimated at 27.4 million bales, basically unchanged from last month's estimate. World cotton ending stocks for MY 1996/97 are forecast at 37.8 million bales, up 1.8 million bales from last month's forecast. The increase in the ending stocks forecast for China, Pakistan, and Egypt more than offset decreases in the ending stocks forecasts for the United States and other countries. World cotton ending stocks for MY 1995/96 are estimated at 35.7 million bales, up 61,000 from last month's estimate. Increases in the ending stocks estimates for Brazil and Egypt more than offset decreases in the ending stocks estimates for India and Indonesia. Cotton Prices The 1996/97 Cotlook A-Index averaged 80.63 cents/lb. during March, up from February's average of 80.4 cents/lb. The A-Index which began the month at 80.8 cents/lb. ended March 27 at 79 cents/lb. The Central Asian quote was the lowest in the Index, averaging 75.31 cents/lb. During March, the California/Arizona and Memphis Territory quotes were above the A-index by an average of 4.50 cents/lb. and 2.50 cents/lb., respectively. May 97 futures prices on the New York Cotton Exchange declined in March. The May contract began the month at 75.63 cents/lb. rising initially upon expectations of a larger U.S. export forecast. However, with continued favorable weather and reports of good progress of Southern Hemisphere crops, futures prices declined during the second half of the month, and closed sharply lower March 31 at 71.35 cents/lb upon larger than expected USDA 1997 forecast for cotton planted area. U.S. Highlights The seasonally adjusted daily rate of U.S. cotton consumption in February amounted to 41,531 bales (480-lb), below January's level of 42,187 bales. A total of 851,863 bales were consumed in February, compared with 840,067 bales in January. The seasonally adjusted annualized consumption rate for the month of February was 10.8 million bales, down from January's 11.0 million bales. Domestic mill purchases were generally slow during February. Purchases were light to moderate for prompt and nearby delivery, while a larger volume was purchased for fourth quarter 1997 through third quarter 1998 delivery. Consumer demand for textile goods was slow. Demand for denim remained steady, while demand for housewares, infant wear, and casual apparel was good. Interest in sales yarn, gray cloth, and fleece was poor, and interest in industrial fabrics was lackluster. Cotton stocks on hand in consuming establishments during February totaled 690,254 bales (480-lb), up from 657,879 bales in January. Stocks held in public storage and at compresses totaled 9.1 million bales, down from 10.5 million in January. Active spindles in place in February 1997 totaled 5.8 million, of which 2.6 million were dedicated to 100-percent cotton, compared with 6.5 million and 2.7 million, respectively, during the same period in 1996. Cotton's share on the cotton spindle system was 78 percent. U.S. cotton exports for January totaled 666,000 bales, 26 percent below the 899,000 bales in December, and 47 percent below January 1996 exports, according to the U.S. Bureau of the Census. The leading markets in January were China, Indonesia, Japan, Korea, Brazil, and Taiwan. U.S. cotton imports for January were negligible compared with 2,000 bales in December 1996 and 3,000 bales in January 1996, according to the U.S. Bureau of the Census. International Highlights Argentine and Australian Cotton Exports Boost the Southern Hemisphere's Share During MY 1996/97, cotton exports from the Southern Hemisphere are expected to account for 17 percent of total world exports, up from 14 percent in 1995/96. This increase is mainly due to large exports from Australia and Argentina, and to a lesser extent due to increased exports from Zimbabwe and Tanzania. Cotton production has declined in Brazil and Colombia, countries with a growing textile sector, and increased significantly in exporting countries. Between 1992/93 and 1996/97 cotton production decreased by 34 and 21 percent in Brazil and Colombia respectively, while cotton production in Australia increased by 46 percent and almost tripled in Argentina during the same period. Brazil To combat an increasingly unbalanced trade deficit, the Government of Brazil has issued a Presidential Decree (Medida Provisoria), effective April 1, which prohibits all import financing for terms of 360 days or less for goods over U.S.$ 10,000 in value. (Short-term financing funds two-thirds of Brazil's imports.) For any sale financed on credit terms of up to 180 days, the decree requires the importer to pay the Brazilian Central Bank the full purchase price in local currency equivalent at the time of delivery. The Central Bank will hold an equivalent dollar amount to pay to the creditor when the payment becomes due. The importer must continue to pay to the creditor any interest incurred. For sales financed on credit terms between 180-360 days, the decree requires the importer to pay the Brazilian Central Bank, in local currency, within the first 180 days after delivery. As with the shorter terms, the Central Bank will pay the creditor in dollars on the due date, while importers must continue to pay creditors any interest due. The only exceptions to this decree are imports financed beyond 360 days, imports by the State oil monopoly PETROBRAS, goods qualifying for drawback, goods in transit or orders concluded prior to March 31, and orders less than $10,000 in value. As a result of this decree, Brazilian importers face a severe squeeze on working capital and higher financing costs. The Presidential Decree is expected to have a significant impact on the cotton industry. Brazil, which produced 3.4 million bales of cotton in 1991/92, is expected to produce 1.4 million bales during 1996/97. During the same period mill use of cotton has grown from 3.3 million bales to an estimated 4 million bales. Given the shortfall in domestic supply, Brazil has become the world's leading cotton importer with 1996/97's imports forecast at 2.4 million bales. According to industry analysts, this measure will represent additional costs to the textile sector which will not only raise the price of imported cotton by about 3 to 4 percent, but will also boost interest rates and consumer prices. Small to medium sized firms are expected to be the most affected. Since a large proportion of 1996/97 imports are already under contract, little change is expected for the current marketing year. However, future cotton imports will be affected, but the magnitude of the impact is as yet uncertain. A few textile mills have reportedly received authorization from the Brazilian Central Bank to extend credit terms with foreign suppliers beyond 360 days. It is unclear, however, if similar authorizations will be granted in the future. An extended payment period is expected to increase the cost of import financing. Questions also remain on how the decree will affect contracts consummated with Mercosur member countries. Reportedly, imports from Mercosur member countries (Argentina and Paraguay) will be granted a temporary exemption. The exemption will permit payment up to 30 days after delivery on shipments valued at U.S.$10,000-$40,000 which are shipped from member countries by July 31, 1997. U.S. cotton exports to Brazil are expected to be hampered by the new decree as U.S. sales are often made under short-term credit arrangements. Under current procedures, the decree affects commodities sold under USDA's GSM-102 credit program. The United States exported cotton valued at U.S. $81 million to Brazil during FY 1996 of which U.S. $14 million were registered for sales under the GSM-102 program. India Although tariff changes are limited, India's recently announced 1997/98 budget provides some incentives for the textile sector. The budget has not yet been passed , but duty reductions are already effective on a provisional basis. The new budget proposal continues the zero import duty on cotton and the 25 percent import duty on cotton waste and yarn. While these duties were earlier listed as exceptions, they are now incorporated into the tariff schedule. The budget also levies a 2 percent surcharge on all items with duties in excess of zero. In addition, local excise tariffs, called Countervailing Duties (CVD) are applied to the CIF plus import duty value of imported products. While CVD's on cotton and cotton waste are zero, a five percent CVD is charged on cotton sewing thread. The CVD on cotton yarn has been reduced from 20 to 18 percent. Items imported under various duty drawback programs are duty free. Import duties on inputs to the textile industry such as dyes, pigments, paints and varnishes, glues, enzymes, and modified starches are reduced from 40 percent to 30 percent. To boost efficiency and make textile mills more competitive before quantitative restrictions are dismantled under the Multifiber Arrangement, import duties on components and parts of textile machinery are lowered to 10 percent. While duty on most fibers remains unchanged, import duty on wool is lowered from 25 to 20 percent and on acetate and flax from 30 to 20 percent. Indonesia Indonesian textile exports continue to grow in volume and value, despite the increase in price due to rising production costs. According to the Ministry of Industry and Trade, textile and textile product exports reached approximately $6.85 billion during CY 1996, more than a 10 percent increase from the previous year. As a result of Indonesia's efforts to maintain and/or increase its world market export share, the Government of Indonesia (GOI) is estimating that the total textile exports will increase to approximately $7.3- $7.5 billion during CY 1997. The GOI has set a total textile and textile export target of $10 billion per year by the end of Indonesian fiscal year 1998/99 (April-March). Achieving the goal may prove to be a challenge to the textile sector which is faced with high production costs and equipped with outdated machinery. Around 60 percent of textile machines in Indonesia are at least 16 years old, the average interest rate in Indonesia is around 20 percent, and textile producers have to pay 10 percent Value Added Tax (VAT) for purchasing raw materials for textile export purposes. With a growing textile sector spurred by exports, Indonesia's mill use of cotton has increased from less than 2 million bales in 1992/93 to a forecasted 2.2 million bales during MY 1996/97. As Indonesia produces negligible amounts of cotton, the textile sector's demand for cotton is met by imports. The United States is the major cotton source for Indonesia with a sale of approximately 762,000 bales during MY 1995/96, a decline of 17.9 percent from the 928,000 bales exported in MY 1994/95. Australia, the second largest supplier, increased its share of the Indonesian cotton import market from 16 percent to 21 percent, while Pakistan's share rose from 2 percent in MY 1994/95 to 9 percent for MY 1995/96. Price considerations are seen as the major factors affecting these changes in market share. Russia The Russian government's "Commission on Operative Issues" (KOV) met at the beginning of March to discuss restructuring Russia's light industries, particularly the stagnating textile sector. Light industry previously produced 25-30 percent of the government revenues, but barely produced over one percent in 1996. The "State Committee for State Property Management" (GKI) is reportedly considering measures such as gaining controlling shares of insolvent textile plants and putting them up for tender. Another proposed measure to boost the textile sector's competitiveness is a reduction in its value-added tax (VAT). Sixty percent of Russia's textile industry is concentrated in Ivanovo Oblast, just northeast of Moscow. Ivanovo's economic troubles stem from the loss of cheap cotton from central Asian producers and the dependence on an insolvent industry (textiles had provided approximately seventy percent of the region's revenue). The supply of Central Asian cotton to Russia has fallen dramatically since 1992, as the cotton producing countries of the FSU favored sales to other countries for hard currency over barter arrangements with Russia. FSU cotton provided to Russia is currently being sold on commercial terms. In 1996, the Federal Government no longer provided special credit subsidies, nor signed any inter-FSU supply agreements. Therefore, Ivanovo authorities are seeking alternative sources of cotton, including the United States, and have started trade discussions with Mali and Benin. During CY 1996, the United States sold nearly 23,000 bales of raw cotton to Russia, the first U.S. sales to that country in nearly a decade. Russia imported a total of 6,200,000 bales of raw cotton during the 1990/91 marketing year. However, due to sourcing problems and problems of the economic viability of Russian textile industries after the break-up of the FSU, imports decreased steadily, reaching a low of 1,467,000 bales during the 1995/96 marketing year. The KOV's attempts to restructure the light industries combined with the availability of international credit terms could revive the Russian textile industry. If Russia's textile industry does revive, it could cause a major change in world cotton trading trends.