COTTON: WORLD MARKETS AND TRADE September 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 330, September 12, 1997.) The report was prepared by the Cotton, Oilseeds, Tobacco and Seeds Division, FAS, Stop 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 October 14, 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 Ann Murphy--Cotton Analyst for the Americas Jon Ann Flemings--Cotton Analyst for FSU & Europe Andrew Levin--Cotton Analyst for Africa & the Middle East 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's TARGET Center at (202) 720-2600 (voice and 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 88.8 million bales, up 1.48 million bales from the last month's projection. The U.S. cotton production forecast is 18.42 million bales, up over 635,000 bales from last month's forecast. World cotton production for MY 1996/97 is estimated at 88.7 million bales, up 226,000 bales from last month's estimate. U.S. cotton production is estimated at 18.94 million bales, unchanged from last month's estimate. World cotton consumption for MY 1997/98 is forecast at 89.6 million bales, up 1.1 million bales from the previous month's projection. The U.S. cotton consumption forecast is 11.30 million bales, up 300,000 bales from last month's forecast. World cotton consumption for MY 1996/97 is estimated at 87.8 million bales, up 1.2 million bales from last month's estimate. U.S. consumption is estimated at 11.12 million bales, up 267,000 bales from last month's estimate. World cotton exports for MY 1997/98 are forecast at 27.9 million bales, up 165,000 bales from the previous month's projection. The U.S. cotton exports forecast is 7.20 million bales, up 100,000 bales from last month's forecast. World cotton exports for MY 1996/97 are estimated at 26.4 million bales, down 150,000 bales from last month's estimate. U.S. exports are estimated at 6.95 million bales, slightly below last month's estimate. World cotton ending stocks for MY 1997/98 are forecast at 35.2 million bales, down 710,000 bales from last month's projection. U.S. cotton ending stocks are forecast at 3.70 million bales, down 100,000 bales from last month's forecast. World cotton ending stocks for MY 1996/97 are estimated at 36.3 million bales, down 679,000 bales from last month's estimate. U.S. cotton ending stocks are estimated at 3.82 million bales, down 280,000 bales from last month's estimate. World Situation World cotton production for MY 1997/98 is forecast at 88.8 million bales, up 1.48 million bales from last month's forecast. Production in 1997/98 is forecast slightly above last season's crop. Increases in the production forecasts for the United States, China, India, and Pakistan more than offset the decreases in the forecasts for Greece and other countries. World cotton production for MY 1996/97 is estimated at 88.7 million bales, up 226,000 bales from last month's estimate. The increase in the production estimate for India was partially offset by the decrease in Australia's production estimate. World cotton consumption for MY 1997/98 is forecast at 89.6 million bales, up 1.1 million bales from the previous month's projection. Increases in the consumption forecasts for China, India and the United States were partially offset by the reduction in Brazil's forecast. Consumption in 1997/98 is forecast 1.8 million bales, or 2 percent, above last season's level. World cotton consumption for MY 1996/97 is estimated at 87.8 million bales, up 1.2 million bales from last month's estimate, mainly due to the increased consumption estimates for China, India, and the United States. World cotton exports for MY 1997/98 are forecast at 27.9 million bales, up 165,000 bales from the previous month's projection, as increased export forecasts for Pakistan and the United States were partially offset by the decreased projection for Greece. Exports in 1997/98 are forecast 1.5 million bales, or 3 percent, above last season's estimate. World cotton exports for MY 1996/97 are estimated at 26.4 million bales, down 150,000 bales from last month's estimate. Slight decreases in the export estimate for Australia and other countries were partially offset by the increased export estimate for Peru. World cotton ending stocks for MY 1997/98 are forecast at 35.2 million bales, down 719,000 bales from last month's projection. The increases in the ending stocks forecast for India and Pakistan, were more than offset by the decreases in the ending stocks estimate for China. Ending stocks in 1997/98 are forecast 1.1 million bales below last season's estimate. World cotton ending stocks for MY 1996/97 are estimated at 36.3 million bales, down 679,000 bales from last month's estimate. The increases in the ending stocks estimates for India and other countries were more than offset by the decreases in the ending stocks estimates for China and the United States. Cotton Prices The 1997/98 Cotlook A-Index averaged 81.28 cents/lb. during August, down from July's 1996/97 average of 81.34 cents/lb. The A-Index which began the month at 81.55 cents/lb. ended August 27 at 80.10 cents/lb. The African quote was the lowest in the Index, averaging 77.97 cents/lb. During August, the California/Arizona and Memphis Territory quotes were above the A-index by an average of 4.41 cents/lb. and 2.91 cents/lb., respectively. October 97 futures prices on the New York Cotton Exchange fell in July. The October contract which began the month at 75.18 cents/lb. closed August 29 at 72.7 cents/lb. Tight world supplies, strong weekly export sales reports, a larger U.S. Census Bureau's seasonally adjusted rate of consumption for the month of June, and expectations of higher U.S. and foreign crop production provided the market with mixed signals. U.S. Highlights The seasonally adjusted daily rate of U.S. cotton consumption in July amounted to 44,007 bales (480-lb), slightly above June's level of 42,847 bales. A total of 773,802 bales (480-lb) were consumed during four weeks in July, compared with 1,043,586 bales in June (5 weeks). The seasonally adjusted annualized consumption rate for the month of July was 11.49 million bales, up from June's 11.18 million bales. Domestic mills purchased a light volume of cotton in July for prompt and nearby shipments. A moderate volume of primarily Delta and Southeastern growth cotton was purchased for prompt through third quarter 1998 delivery. Housewares items remained top sellers. Mill production of sales yarn remained heavy. Consumer interest in denim products decreased. Sales of gray cloth and industrial goods were lackluster. Demand for casual apparel and infant wear remained steady. Most mills operated on a five day work week. Cotton stocks on hand in consuming establishments at the end of July totaled 703,215 bales (480-lb), down from 711,929 bales in June. Stocks held in public storage and at compresses totaled 3.1 million bales, down from 4.0 million in June. Active spindles in place in July 1997 totaled 5.3 million, of which 2.6 million were dedicated to 100-percent cotton, compared with 5.7 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 June totaled 614,000 bales, slightly below the 619,000 bales in May and 56-percent above June 1996 exports, according to the U.S. Bureau of the Census. The leading markets in May were China, Turkey, Mexico, Korea, Japan, Indonesia, and Brazil. U.S. cotton imports for May totaled less than 1,000 bales compared with 115,000 bales in June 1996, according to the U.S. Bureau of the Census. Uzbekistan was the main source for imports in June. International Highlights Bangladesh Cotton consumption in Bangladesh continues to increase due to the expansion of the local spinning industry. Cotton consumption is expected to increase by 11 percent in 1997/98 over 1996/97 levels to 700,000 bales. The private sector dominates the cotton industry, with over 90 percent of cotton consumption by private mills, an increase from 30 percent in the mid eighties. Based on industry projections, it is expected that the 1.9 million working spindles in Bangladesh will increase to 5.0 million by 2005. In order to meet the expanding demand for raw cotton, Bangladesh has steadily increased its cotton imports, which are forecast to reach 620,000 bales in 1997/98. With government subsidies for locally produced yarn and fabric, special trading terms for textile exports to the European Union, and domestic demand for cloth exceeding the population growth, it is expected that cotton imports will continue to increase by 10 percent per year over the next few years. The United States is the second largest supplier of raw cotton to Bangladesh, with a 20 percent market share. The CIS countries are the main U.S. competitors, holding over 40 percent of Bangladesh's cotton market. While Pakistan is estimated to increase its production in 1997/98, and may export surplus production to Bangladesh, many buyers are willing to pay a premium for U.S. cotton because of its better quality and timeliness of delivery, and U.S. exports are expected to grow over the long term. China In August, the National Cotton Policy Council (NCPC) met to set China's cotton policy for the marketing year beginning in October. The provisions of the policy reforms, aimed at encouraging greater use of domestic cotton and the reduction of cotton imports, were outlined by Vice Premier Zhu Rongji as: 1) Initially, 500,000 metric tons of cotton from Xinjiang will be sold to domestic mills with no value-added tax (VAT) charged, provided that the semi-finished products are then exported. 2) The price of Xinjiang cotton will be reduced to US $241 per metric ton. 3) The Bank of China will lend money to mills to buy cotton from Xinjiang without requiring the kind of detailed review of the financial well-being of those enterprises that normally is conducted before loans can be approved. 4) All cotton producing provinces will be allowed to reduce the price at which cotton is sold to mills by up to 6 percent. 5) Establishment of a cotton exchange in which prices for domestic cotton are permitted to move up and down within limits on a weekly if not daily basis, including giving discretion to provincial authorities to negotiate sales of cotton to mills. 5) Granting of more freedom to farmers to not produce cotton in areas where yields are low and the costs of producing cotton are high relative to other crops. However, many aspects of the policy reform remain unclear. For instance, whether the VAT will be waived entirely, or if it will be charged initially then returned when the equivalent amount of the product is exported, as is the case with joint venture mills that import raw cotton and export semi-finished products. Also, whether the 6-percent reduction in price will be in addition to or take the place of the 4-percent reduction allowed last year. Vice Premier Zhu Rongji affirmed that cotton is a strategic material and that the "three no's" policy -- no free prices, no direct transactions between farmers and mills, and no management of cotton marketing by provincial authorities--regarding cotton will continue. Rongji also suggested several steps that must be taken to ensure that past problems of excess supplies of expensive domestic cotton do not reappear as soon as current stockpiles are reduced. These included the establishment of a regular cotton exchange in which more flexibility on pricing would be allowed. The effect of China's policy changes on world trade is undetermined, especially in light of previous Chinese policy proposals also aimed at limiting imports and reducing stocks. Instead of stopping or slowing down, imports increased over the months immediately following the previous announcements, and remained steady. Though US cotton prices remain competitive, US sales to China slowed during the period following the meeting of the NCPC. Many traders are reportedly taking a "wait and see" approach, in part for fear of offending the government by appearing to continue business as usual (i.e., imports) in the immediate aftermath of the announced reforms. The slow sales could also be due to expectations of further price decreases following an anticipated increase in USDA's 1997/98 cotton production estimate. The world cotton industry is greatly influenced by China's cotton policy. Despite a large stock-pile of cotton, China continues to import substantial amounts of cotton lending strength to world prices. China is the world's largest cotton consumer and importer, and for the previous marketing year was the largest producer. Based upon reports of lower planted area, MY 1997/98's production is projected to drop to 17.5 million bales from the previous year's 19.3 million. China is projected to be the leading importer of U.S. cotton during 1997/98, for the fourth consecutive marketing year. China is an important market for U.S. cotton to the tune of 1.9 million bales of cotton valued at U.S. $727 million shipped in CY 1996. That represents 61 percent of China's total 1996 imports of 3.1 million bales. During marketing year 1997/98, the United States is expected to supply at least half of China's forecasted 2.7 million bale import level. Indonesia's Imports of U.S. Cotton The United States is forecast to supply roughly one third of Indonesia's cotton imports for MY 1997/98. This year, exports of U.S. cotton to Indonesia should recoup some market share, recovering from a dip in performance last year, MY 96/97, when U.S. market share garnered a quarter of Indonesia's cotton imports. The U.S.'s best recent performance in the Indonesian cotton import market was in MY 94/95 when the U.S. supplied 45 percent of all imports. The past two years have shown ups and downs in U.S. market share (MY 95/96, 36 percent; MY 96/97, 25 percent) but the outlook is positive: U.S. cotton should account for between 30 percent to 40 percent of Indonesia's imports for MY 97/98. The U.S. has sustained success as a cotton exporter to Indonesia's textile industry. In the past five marketing years Indonesia has ranked among the top five customers of U.S. raw cotton. This Asian nation has a relatively rapidly expanding economy even among its fast-growing neighbors. In the last five years alone, Indonesia's real GDP growth averaged more than seven percent per year. During the 1990's the textile sector has grown at an average of 5 percent, compared to the world average of below three percent. The United States has been supplying this industry as it grows. The recent depreciation of Indonesia's currency will make U.S. cotton relatively more expensive to import, but will also make Indonesia's value-added textile exports more competitive in world markets. Textile exports are likely to continue to grow in volume and value. In the early months of MY 1996/97 cotton imports grew rapidly as Indonesian domestic cotton consumption climbed and textile export volume grew. Over the rest of the marketing year the growth was more modest, reaching 485,000 tons, or overall a 2 percent growth over the previous year. As top exporter, the United States was followed by Australia, the Newly Independent States of the Former Soviet Union, Tanzania, and India. Price considerations explain the latter's inroads into the Indonesian market for cotton. To help U.S. cotton exporters compete in this environment, the U.S. export credit guarantee program, or GSM-102 is available. It has been operational for cotton to Indonesia since 1993. The program allows international buyers to purchase U.S. cotton or other commodities from private U.S. exporters, with U.S. banks providing financing to the importer's bank on commercial terms. A main incentive of the program is that the Commodity Credit Corporation of the USDA guarantees the payment to the U.S. bank, in case of default. GSM registered cotton sales to Indonesian importers currently total $13.5 million. Indonesian traders and industry sources forecast that the United States will continue to be the leading cotton supplier to Indonesia.