COTTON: WORLD MARKETS AND TRADE May 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 326, May 12, 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 June 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 Larry Blum, 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 1997/98 is forecast at 87.5 million bales, down about 450,000bales from the current season. U.S. cotton production is forecast at 18.5 million bales, down 2.3percent from 1996/97. World cotton production for MY 1996/97 is estimated at 87.9 million bales, down 177,000 bales from last month's forecast. U.S. cotton production is estimated at 18.9 million bales, unchanged from last month's forecast. World cotton consumption for MY 1997/98 is forecast at 88.5 million bales, up 2 percent from the current season. U.S. consumption is forecast at 11.0 million bales, 100,000 bales higher than 1996/97's estimate. World cotton consumption for MY 1996/97 is estimated at 86.4 million bales, down 115,000 bales from last month's forecast. U.S. consumption is estimated at 10.9 million bales, down 100,000 bales from last month's forecast. World cotton exports for MY 1997/98 are forecast at 27.2 million bales, up 2 percent from the current season's estimate. U.S. exports are forecast at 7.3 million bales, 4 percent higher than the current season's estimate. World cotton exports for MY 1996/97 are estimated at 26.7 million bales, down 45,000 bales from last month's forecast. U.S. exports are forecast at 7.0 million bales, unchanged from last month's forecast. World cotton ending stocks for MY 1997/98 are forecast at 36.5 million bales, down about 3 percent from this season's estimate. U.S. ending stocks are forecast at 4.3 million bales, 5 percent higher than the beginning level. World cotton ending stocks for MY 1996/97 are forecast at 37.5 million bales, down 308,000 bales from last month's forecast. U.S. ending stocks are forecast at 4.1 million bales, up 100,000 bales from last month's forecast. World Situation World cotton production for MY 1996/97 is estimated at 87.9 million bales, down 177,000 bales from last month's estimate. Major adjustments include the following: Argentina's production was decreased by 200,000 bales due to lower yields resulting from dry spells in January and March. Australia's production was increased by 100,000 bales as excellent pre-harvest and harvest weather has increased yield prospects. World cotton consumption for MY 1996/97 is estimated at 86.4 million bales, down 115,000 from last month's estimate. Decreases in the consumption estimates for the United States and Uzbekistan more than offset the minor increases in the consumption estimates for other countries. World cotton exports for MY 1996/97 are estimated at 26.7 million bales, down 45,000 bales from last month's estimate. The increases in the export estimates for Australia and Uzbekistan were more than offset by the decreases in the export estimates for Argentina and other countries. World cotton ending stocks for MY 1996/97 are estimated at 37.5 million bales, down 308,000 bales from last month's estimate. The decreases in the ending stocks estimates for Korea and Argentina more than offset an increase in the ending stocks estimates for the United States. Korea's ending stocks estimate decreased due to upward adjustments in consumption for 1992/93 and 1993/94. World and U.S. Cotton Outlook for Marketing Year 1997/98 USDA's initial world supply, use and trade projections for MY 1997/98 indicate stable production, higher consumption and lower stocks. World production for the coming season is forecast at 87.5 million bales, about equal the current season's estimate. World consumption is projected at 88.5 million bales, up 2.4 percent from the current marketing year. Imports, at 27.5 million bales, nearly equal 1996/97 level, while exports are projected 1.8 percent higher at 27.2 million bales. These initial projections would result in MY 1997/98 ending stocks of 36.5 million bales, 2.8 percent below the carryover estimate for the current season. The U.S. outlook for 1997/98 is for a slightly smaller production, continued strong demand and marginally higher stocks. The 1997 crop is projected to decrease 2.4 percent to 18.5 million bales based on planting intentions of 14.5 million acres, average growing conditions and trend yields. U.S. exports are projected to increase by 4.3 percent to 7.3 million bales. These projections would result in ending stocks of 4.3 million bales, 4.9 percent higher than the estimated beginning level. Cotton Prices The 1996/97 Cotlook A-Index averaged 78.92 cents/lb. during April, down from March's average of 80.63 cents/lb. The A-Index which began the month at 78.15 cents/lb. ended April 30 at 79.55 cents/lb. The Central Asian quote was the lowest in the Index, averaging 75.39 cents/lb. During April, the California/Arizona and Memphis Territory quotes were above the A-index by an average of 3.25 cents/lb. and 1.68 cents/lb., respectively. May 97 futures prices on the New York Cotton Exchange remained relatively range-bound in April. The May contract began the month at 71.7 cents/lb. rising initially upon continued strong export sales. However, reports of a large Australian crop and large U.S. intended plantings prevented major price gains, and May 97 futures prices closed April 30 at 71.90 cents/lb. U.S. Highlights The seasonally adjusted daily rate of U.S. cotton consumption in March amounted to 40,309 bales (480-lb), below February's level of 41,167 bales. A total of 1,047,000 bales were consumed during five weeks in March, compared with 847,050 bales in February (4 weeks). The seasonally djusted annualized consumption rate for the month of March was 10.5 million bales, down from February's 10.7 million bales. Domestic mill buying was active during March. Purchases were heavy for prompt and nearby shipments. A large volume of cotton was purchased for third quarter 1997 through third quarter 1998 delivery. Consumer demand for textile goods was good. Interest in denim products increased. Demand for housewares, infant wear, casual apparel, and sales yarn was good. Demand for gray cloth and fleece was fair, while demand for industrial fabrics remained weak. Cotton stocks on hand in consuming establishments during March totaled 699,185 bales (480-lb), up from 682,864 bales in February. Stocks held in public storage and at compresses totaled 7.6 million bales, down from 9.1 million in February. Active spindles in place in March 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 February totaled 728,000 bales, 9 percent above the 666,000 bales in January, and 44 percent below February 1996 exports, according to the U.S. Bureau of the Census. The leading markets in February were China, Indonesia, Japan, Mexico, Thailand, and Taiwan. U.S. cotton imports for February totaled 3,000 bales compared with 8,000 bales in February 1996, according to the U.S. Bureau of the Census. Turkmenistan and Uzbekistan were the main sources for imports in February. No new Step Three cotton import quota was announced by the USDA, on May 8, 1997. U.S. price quotations declined to the point where they were considered competitive in world cotton trade. After 80 consecutive 10-week periods in which U.S. price quotations exceeded the A-Index by more than 1.25 cents per pound, thereby triggering the special import quotas, U.S. prices for the week ending May 8 were above the A-Index by only 0.96 cents. Each of the 80 announced quotas was approximately 200,000 bales in size, the amount estimated to be consumed by American textile mills in one week's time. To be incorporated under a quota, upland cotton must be purchased not later than 90 days and imported into the United States not later than 180 days from the beginning of the quota period. Of the 80 quotas, 43 have reached the end of the 180-day period and have closed. Approximately 765,000 bales were imported under these quotas. As of May 8, 1997, twenty-six quotas remain open. Two of these will close each week. There are also 11 quotas which have been announced but will enter into effect over the next 6 weeks. The final date for purchasing cotton under the last of these quotas is September 13, 1997, while the final date for importing is December 12, 1997. International Highlights India The Government of India released an additional export quota of 22,000 bales (170-kg) of medium staple cotton, raising 1996/97's total quota to 1.24 million bales (170-kg), or approximately 1 million 480-lb bales. Of the additional quota, 12,000 bales have been allocated to the Cotton Corporation of India, and 10,000 to the Madhya Pradesh Federation. To date, a total of 1.078 (170-kg) bales has been registered for exports, while actual exports, including spillover from 1995/96's quota, totaled 906,317 bales (170-kg). Thailand To improve the competitiveness of Thai textiles in the global market, the Royal Thai Government, with joint cooperation between the Bank of Thailand, Ministry of Finance, and the Ministry of Industry, initiated a project in mid March to provide soft loans of 25 billion baht (about US$1.0 billion) to Thai textile manufacturers. The loans are aimed at replacing inefficient machinery to improve the quality of Thai textile products. The soft loan project will be available during 1997-2000, starting with a lending of about 2 billion baht in 1997. According to a government official, 25 percent of total loans will be provided by the Bank of Thailand, through the Export Import Bank of Thailand (Exim Bank) and the Industrial Finance Corporation of Thailand (IFCT), at an interest rate of 2.5 percent per year. The 18.75 billion baht balance will be lent by the Exim Bank and IFCT at interest rates of between 11 to 13 percent. Cotton consumption in Thailand, one of the world's largest textile exporters, is declining. This is the result of high production costs, shortage of working capital, and antiquated equipment. In recent years, competitors from neighboring countries, who enjoy lower labor costs, have posed an increasing threat to Thai textile product exports. Although textile exports remained the largest source of foreign exchange earnings for the country, export value dropped by 16 percent in 1996. Zimbabwe Zimbabwe is starting the privatization of various agricultural parastatals with the sale of the national cotton buying and ginning corporation, the Cotton Company, later this year. This is a major change for Zimbabwe which has historically operated under a political creed that emphasizes state control of the economy. The call for economic reform by the International Monetary Fund (IMF) and the World Bank, and enforced by IMF's threat of holding back on aid funding has brought about the move toward privatization. Even though the decision to privatize was made over a year ago, policy makers in the Finance Ministry are still debating details of the sale. One area of discussion is the valuation of assets. The government of Zimbabwe (GOZ) insists that the actual value of the Cotton Company's eight ginneries well exceeds the book value of $40 million. However, serious buyers are only willing to pay the book value plus a small percentage for goodwill. The question of how to divide the shares has also become a hurdle for the new venture. The ususal method of dispersion via the national stock exchange is forbidden due to the racial inequality of the exchange. Currently, the decision is that the shares will be offered to specific groups as follows: the GOZ, 25 percent; small holders, 20 percent; "indigenous investors", 15 percent; the general public, 15 percent; large-scale commercial growers, 10 percent; the National Investment Trust, 10 percent; and management and employees, 5 percent. Large- scale commercial estate growers, who account for one-third of the total crop, are extremely unhappy with their proposed ten percent because they fear that they will have little to no say in the new organization's affairs. Depending on prices and production, cotton normally ranks second after tobacco as Zimbabwe's most profitable crop, while all other crops lag far behind. As domestic consumption decreases due to the closure of mills and production is expected to increase, lint available for export could increase significantly. During the 1996/97 marketing year, Zimbabwe's estimated production is 400,000 bales of cotton and is expected to export 225,000 bales of lint. The eight gins owned by the Cotton Company play a major role in the country's economy because the Cotton Company purchases, processes and sells about 80 percent of the national crop. In the presence of limited financial resources, the Cotton Company also offers a credit scheme specifically for cotton production through which over 50 percent of producers in the country benefit. Zimbabwe's single largest cotton export market is South Africa while significant exports are also channeled to Germany, Sweden, Italy, Spain and Switzerland. The success or failure of the privatization of the Cotton Company could have a substantial effect on these six markets and indirectly on other cotton exporters, including the United States.