World & U. S. Situation
World cotton production for MY 1997/98 is forecast at 91.0 million bales, up 120,000 bales from last month's forecast. Increased 1997/98 production estimates for Australia and Brazil were partially offset by a reduction in Tanzania. U.S. cotton production for MY 1997/98 is forecast at 18.98 million bales, unchanged from last month's forecast.
World cotton production for MY 1996/97 is estimated at 89.2 million bales, unchanged from last month's estimate. U.S. cotton production for MY 1996/97 is estimated at 18.94 million bales, unchanged from last month's estimate.
World cotton consumption for MY 1997/98 is forecast at 89.3 million bales, up 125,000 bales from the previous month's projection. Decreases in the consumption forecasts for Indonesia and other countries were more than offset by increases in the Russia and the United States. U.S. cotton consumption for MY 1997/98 is forecast at 11.50 million bales, up 100,000 bales from last month's forecast.
World cotton consumption for MY 1996/97 is estimated at 88.6 million bales, up 150,000 bales from last month's estimate, due to an increase in Russia. U.S. consumption is estimated at 11.13 million bales, unchanged from the previous month's estimate.
World cotton exports for MY 1997/98 are forecast at 26.3 million bales, down 180,000 bales from the previous month's projection, as decreased export forecasts for India and Tanzania are partially offset by an increase in Uzbekistan . U.S. cotton exports for MY 1997/98 are forecast at 7.3 million bales, unchanged form last month's forecast.
World cotton exports for MY 1996/97 are estimated at 26.5 million bales, unchanged from last month's estimate. U.S. cotton exports for MY 1996/97 are estimated at 6.87 million bales, unchanged from the previous month's estimate.
World cotton ending stocks for MY 1997/98 are forecast at 38.3 million bales, up 45,000 bales from last month's projection, and 5 percent above the beginning level. Increased 1997/98 ending stocks estimates for Australia and India were partially offset by decreases in the United States and Uzbekistan. U.S. cotton ending stocks for MY 1997/98 are forecast at 4.2 million bales, down 100,000 bales from last month's forecast.
World cotton ending stocks for MY 1996/97 are estimated at 36.4 million bales, unchanged from last month's estimate. U.S. cotton ending stocks for MY 1996/97 are estimated at 3.97 million bales, the same as the previous month's estimate.
The 1997/98 Cotlook A-Index averaged 71.34 cents/lb. during January, down from December's average of 74.48 cents/lb. The A-Index began the month at 73.15 cents/lb. and ended January 29 at 69.45 cents/lb. The African quote was the lowest in the Index, averaging 69.67 cents/lb. During December, the California/Arizona and Memphis Territory quotes were above the A-index by an average of 5.25 cents/lb. and 3.85 cents/lb., respectively. March '98 futures prices on the New York Cotton Exchange continued to fall in January, reaching a low of 64.77 cents/lb. on January 23, but showed some strength in the latter days. The March contract which began the month at 67.11 cents/lb. closed January 30 at 66.32 cents/lb.
The seasonally adjusted daily rate of U.S. cotton consumption in December amounted to 45,853 bales (480-lb), above November's level of 44,413 bales. A total of 953,893 bales (480-lb) were consumed during five weeks in December, compared with 854,886 bales in November (4 weeks). The seasonally adjusted annualized consumption rate for the month of December was 11.97 million bales, up from November's 11.59 million bales. Domestic mills purchased a light volume of cotton for second and third quarter delivery. A moderate volume was also purchased for prompt and nearby deliver. Demand for lower quality cotton increased. Demand for coarse count yarns was moderate, while fine count yarn demand was strong. Most mills operated on a five day work week, while a few operated six to seven days.
Cotton stocks on hand in consuming establishments at the end of December totaled 562,379 bales (480-lb), up slightly from 569,160 bales in November. Stocks held in public storage and at compresses totaled 11.94 million running bales, up from 10.74 million in November. Active spindles in place in December 1997 totaled 5.6 million, of which 2.6 million were dedicated to 100-percent cotton, compared with 5.4 million and 2.6 million, respectively, during the same period in 1996. Cotton's share of the cotton spindle system approached 80 percent.
U.S. cotton exports for November totaled 581,000 bales, above the 400,000 bales in October and 8,000 bales above November 1996 exports, according to the U.S. Bureau of the Census. The leading markets in November were China, Mexico, Japan, Korea, and Indonesia.
U.S. cotton imports for November totaled 249 bales compared with 18,773 bales in November 1996, according to the U.S. Bureau of the Census. Mexico was the only source for cotton imports in November.
US cotton is increasingly being sold under GSM-102 financing. In the first four months of FY 1998 cotton registrations have reached $183.5 M. Registrations over the last four years have averaged $321.5 M annually. The pace is picking up across most regions, with notable expansion in Turkey, Korea, and Mexico, and Central America.
Korea has registered $32.2 M of its currently allocated $130 M in a four-week period. A second tranche of $70 M will be considered if this is exhausted. Mexico has registered $90.6 M in GSM-102 sales for cotton. Unlike the program for Korea which uniquely has a separate designation for cotton, the total allocation of $500 M for Mexico is for a basket of commodities including cotton. Please refer to Table 3 for more details.
(Ann Murphy; 202-720-9513)
Australian and US cotton sales are attuned to Asian markets' needs for targeted deliveries and financing options as Asian customers face liquidity problems in purchasing cotton. US and Australian cotton are competing intensely for sales to Asian markets through the end of MY 1997/98. Price discounts, financing, and timely delivery will be important factors in determining market share. As banking operations stall, particularly in Indonesia, US cotton presents an option with financing opportunities, through GSM-102. Australian intentions to commence an export insurance scheme are detailed in a separate article in this month's circular. Australian exports to Asian markets have the advantage of shorter delivery time and lower freight costs, particularly to Indonesia.
Last season Australia's most important buyer was Indonesia, which bought more than one fifth of its entire exports. Indonesia imported 466,000 bales of cotton in MY 95/96 of which 98,000 bales were from Australia. The US and Australia are the leading competitors for this market, but Indonesia historically has bought about a third of its imports from other suppliers. Due to the devalued rupiah, Indonesian mills now pay three times more for imported cotton than they did seven months ago. The Indonesian raw cotton market is valued at approximately $500 M. Its major cotton sources from 1994 through 1997 are shown in the chart below.
Indonesian Raw Cotton Imports: by volume
|Exporting Country||MY 94/95 Market Share||MY 95/96 Market Share||Jan - Sept '97 Market Share|
|Former Soviet Union||9 %||4%||6%|
Over the past five years Indonesia was the United States' fourth or fifth largest cotton customer, taking about 8 percent of total US exports. During that period, the Indonesian textile industry became Australia's biggest buyer. Australian cotton production expanded as the Indonesian textile industry boomed.
Australia exports approximately ninety percent of its cotton production. The expansion of the Indonesian textile industry in this decade might have been a leading cause for Australian farmers' optimism and planting decisions. The main producing areas of Australia are New South Wales and Queensland, which account for 70 percent and 30 percent of production, respectively. In these traditional cotton producing areas significant land has been brought under cotton cultivation, increasing the area by 50 percent since 1995. The Indonesian economic problems have raised concerns within Australia that it needs to diversify its export base and become less dependent upon cotton. Export markets can often make the difference between profit and loss to farmers.
(Ann Murphy; 202-720-9513)
The USDA's Commodity Credit Corporation (CCC) administers export credit guarantee programs for commercial financing of U.S. agricultural exports. The programs encourage exports to buyers in countries where credit is necessary to maintain or increase U.S. sales, but where financing may not be available without CCC guarantees.
Two programs underwrite credit extended by the private banking sector in the United States (or, less commonly, by the U.S. exporter) to approved foreign banks using dollar-denominated, irrevocable letters of credit to pay for food and agricultural products sold to foreign buyers. The Export Credit Guarantee Program (GSM-102) covers credit terms up to three years. The Intermediate Export Credit Guarantee Program (GSM-103) covers longer credit terms up to 10 years.
Under these programs, the CCC does not provide financing but guarantees payments due from foreign banks. Typically, 98 percent of principal and a portion of interest at an adjustable rate is covered. Because payment is guaranteed, financial institutions in the United States can offer competitive credit terms to the foreign banks, usually with interest rates based on the London Inter-Bank Offered Rate (LIBOR). Any follow-on credit arrangements between the foreign bank and the importer are negotiated separately and are not covered by the CCC guarantee.
The GSM-102 program is particularly important in facilitating the sale of cotton in Asian markets impacted by the currency crisis, which has resulted in a tightening credit availability. Two important markets in the region, Korea and Indonesia, have begun to draw upon GSM allocations, which may increase U.S. market share in these countries. Last year GSM sales to these countries represented 6 percent of total U.S. cotton shipments.
USDA has reduced the estimate of Indonesia's cotton imports to 1.8 million bales from 2.1 million in 1996/97 due to the continuing adverse impacts of the troubled economy on domestic cotton consumption. The import outlook is being closely monitored as a recent report from the U.S. Agricultural Counselor in Jakarta suggests that cotton imports could go down as low as 1.725 million bales due to decreased mill use. U.S. export sales commitments to Indonesia were 429,000 bales as of January 29, 1998.
However, outstanding cotton sales by the United States of 182,000 bales are at risk if mills are unable to secure letters of credit. Analysts are carefully following the registration of cotton under GSM which to date has reached only $2.1 million, compared to $13.8 million last year.
Australian Prime Minister John Howard recently announced that their government will give credit guarantees through the Export Finance and Insurance Corporation, EFIC. Unlike the $300 million line of credit announced for South Korea last month, there will be no cap on the Indonesian guarantee. Australia's most valuable export to Indonesia last year was cotton, worth nearly Australian $350 million. Details on the terms and conditions of this program are not known at this time.
Following a recent visit to the region by senior USDA officials, Under Secretary August Schumacher, Jr., noted that a PL 480 Title I program for Indonesia would be considered. Suggestions were made at the recent National Cotton Council annual meeting that cotton be included in this program.
Korea has registered $32.2 million in GSM for cotton, whereas last year, Korea had registered only $14.1 million out of a total of $76 million available for cotton. It is anticipated that Korea will utilize its $130 million initial GSM allocation for cotton. As of January 29, 1998, U.S. export sales commitments for Korea were 650,000 bales, which if all sales were exported, would result in a market share of 54 percent; however, with additional use of GSM it is possible that U.S. cotton exports could reach 800,000 bales, which would result in a market share of 67 percent, an increase of 29 percent over last year. At the recent National Cotton Council annual meeting traders emphasized the importance of GSM credits in this market, and suggested that an 800,000 bale estimate for U.S. sales to Korea may be realistic.
(Andy Levin; 202-720-9488)
Feature Article: Indications for 1998/99 Foreign Cotton Area
Excerpt from World Agricultural Production (February 1998 edition)
Foreign cotton area for the 1998/99 season depends on several factors with cotton prices and those of competing crops playing a crucial role. Foreign cotton area is also influenced by domestic and world financial conditions, government policies, and weather. The Cotlook A-Index represents the price level of international raw cotton offered to the market on a daily basis from several cotton trading countries. Generally, a very strong direct relationship exists between cotton area and this price index for the previous year. During the first six months of 1997/98 marketing year, the index has dropped 12 cents. This factor alone suggests that foreign cotton area next year will drop below the 28.4 million hectares estimated for 1997/98. However, area shifts also depends upon the price level of other crops in relation to the price of cotton, production cost associated with cotton production, and government policies. The drop in area for 1998/99 is confirmed by U.S. agricultural attaches stationed in major cotton producing countries worldwide.
Preliminary indications are that foreign cotton area in 1998/99 could range from 27.5 to 28.5 million hectares, compared with an estimated 28.4 million for 1997/98. The high end of the forecast range implies the advantageous impact of weaker prices for competing crops, favorable weather, and supportive government policies in several large producing countries. The low end of the forecast range considers the effect of higher competing crop prices. In addition, area harvested could be reduced due to weather and financial problems.
China: Cotton area for 1998/99 is highly uncertain. A continuation of circumstances that have plagued cotton production in the recent past indicate that area will decline to around 4.3 million hectares. This drop continues a yearly decline that begin after 1992 when area reached a recent high of 6.8 million hectares. For the 1998/99 season, China announced a new policy which will permit growers in certain regions along the Yellow River to stop growing cotton. This new policy is reflective of growers disenchantment with cotton production, given the high financial and labor costs and difficulties selling their crop. Reductions in the Yellow River area as a result of the new policy are in addition to continuing shifts in area from the North China Plain to other areas including Xinjiang province. These new areas provide higher yields and are less prone to disease and insect. Farmers are switching to other crops that provide a higher return on investment and require less costly inputs, especially labor. Currently, corn prices are higher than last year and unofficial cotton prices lower. Grains and vegetables are the most frequently mentioned alternative crops, especially in northern provinces of the North China Plain. It is unlikely that the official procurement price (RMB14,000/MT or about US$0.765 per pound, RMB8.30 = US$1.00) which the Government pays farmers will increase.
Former Soviet Union (FSU): Cotton area for 1998/99 is forecast to remain near this year's 2.5 million hectares. As in past years, two opposing forces continue to influence the size of the cotton area. The Republics want to maintain or expand area to earn hard currency; on the other hand, they also want to increase food production to feed their growing populations. In addition to their food supply concerns, they continue to experience increases in land salinity from cotton production, encouraging a shift of land out of cotton cultivation. Uzbekistan is the FSU's largest cotton producer with production regulated by the government. At present, the Government 's policy for 1998/99 is to stabilize area at 1.5 million hectares, equaling this year's area. Turkmenistan, the second largest producer in the FSU, has had difficulties in maintaining production in recent years but recovered in 1997/98 after dropping to nearly half the previous year's level in 1996/97. The Government's action to privatize agricultural land in 1997/98 apparently resulted in sufficient incentives to reverse the downward spiral in production. However, cotton prices have remained low and input and machinery remain in short supply. Unless significant programs are enacted to address these problems, production is likely remain stagnant at current levels with the 1998/99 area equaling the 0.6 million hectares of 1997/98.
Mexico: Cotton area is expected to increase to 250,000 hectares for 1998/99 from 200,000 in 1997/98, as growers respond to a new government assistance to cotton growers of 550 pesos per hectare under the new Rural Alliance Program (roughly US$66 per hectare, US$=8.277 pesos). This support is in addition to that already provided by the Program of Direct Aid to the Countryside (PROCAMPO). PROCAMPO's payments are also around US$65 per hectare. Under this program cotton producers received US$65 per hectare for the spring/summer 1997 crop cycle. However, production costs vary widely from area to area and are substantially higher than the support level. In northern Sonora, costs are estimated at US$1,153 per hectare while in the La Laguna/Torreon area, costs are reportedly US$897 per hectare. Production costs in coastal areas are lower, estimated at US$767 per hectare. According to industry sources, the national average costs are estimated at US$1,025 per hectare. With February Mexican cotton quoted at US$80 per 100 pounds, growers are making a profit given the national average yield of 881 kilograms per hectare. However, farmers are also indicating that they can do better with other crops because of cotton's higher relative cost of production.
Brazil: Cotton area for 1998/99 is forecast at 0.9 million hectares. The primary reasons for the potential stable area are increases in the official minimum price of cotton, up nearly 8 percent from last season, and increased financing at lower interest rates in 1997/98. These factors are expected to carry over into 1998/99, holding area near the 1997/98 level. Cotton production takes place in three separate regions: Northeast, Center-South, and Center-West. During the 1997/98 sowing season, area shifts occurred among these regions. Area increased in the Center-West states of Goias, Mato Grosso, Mato Grosso do Sul, and western Minas Gerais where large farms allow for greater mechanization and more efficient input use. The larger area in these states are expected to offset drops in cotton areas in the Center-South states of Parana and Sao Paulo and in the Northeast. The higher cost of production in the Center-South and greater competition from alternative crops, such as soybeans, have encouraged growers to shift out of cotton into alternative crops.
Argentina: Cotton area for 1998/99 is projected near the 1.0 million hectares estimated for 1997/98. This forecast is very tentative since the 1997/98 crop is at the boll opening stage and the planting of the 1998/99 crop will not occur until September. The level of the current crop is a result of higher prices last year and the demand pull from Brazil during 1997. The forecast for 1998/99 assumes that returns to alternative crop are not too different from the current year and that the strong demand from Brazilian textile mills continues during 1998. This situation is likely, even in the face of expanding production in Brazil and lower world prices, since long-term financial arrangements are in place for continued Argentine cotton imports into Brazil and because Argentina has made substantial investment in its cotton sector.
Paraguay: The 1998/99 cotton area is projected at 325,000 hectares, well below the government plan of 450,000. There are several factors which will play a significant role in Paraguay's cotton outlook for 1998/99. Primary among these are the uncertain outlook for critical government financial support both in amount and in timeliness, official efforts to support production of alternative crops, and insufficient farmer knowledge of modern farming methods. Further, the effect of cotton expansion in Brazil, Paraguay's main export market, may reduce demand there, with subsequent lower production incentives for Paraguayan farmers. Although greater government assistance has resulted in increased planted area in the current season, planted area fell well short of the government's stated goal of about 400,000 hectares. Nevertheless, the Government is pushing for continued area expansion under its reactivation plan for the cotton sector for the outyear. Paraguay is not likely to reach this goal due to the uncertainties mentioned above.
Pakistan: Cotton area for 1998/99 should not be significantly differ from the 2.9 million hectares estimated for 1997/98 since domestic seed cotton prices this year remained relatively high compared with previous year's. Strong demand by the textile industry and exporters under the free trade regime have supported domestic prices. Farmers average sale price of seed cotton has been between Rs. 800-950 per maund (37.324 kilograms) or about US$0.22 to US$0.26 per pound at the current exchange rate of US$1=Rs. 44. The domestic lint prices have also increased above the level of prevailing world lint prices after taking into account the quality differences. Also, the planned wide scale distribution of insect and virus tolerant varieties for planting in 1998/99 will help to maintain cotton area at 1997/98 levels.
India: Despite high domestic prices during the ongoing 1997/98 marketing season, cotton planting in 1998/99 is likely to decline as farmers respond to heavy losses suffered in the current season, particularly in Punjab and Andhra Pradesh, due to untimely rains and pest attack. Factors influencing cotton planting for the 1998/99 season are: end season price for the 1997/98 crop; 1998 monsoon rainfall situation; pest and weather related problems encountered by the cotton farmers during the current year; and the 1998 export outlook for cotton yarn. The net impact of all these factors could be a marginal decline in cotton planting this year from the 1997/98 near record level of 9.0 million hectares. Because of the cotton losses in northern states and Andhra Pradesh, farmers may switch to other competing crops (rice/coarse cereals/sugarcane in northern states and tobacco/chillies/coarse cereals in Andhra Pradesh). However, the likely area decline in these states would be partially offset by increased cotton area in some of the central and southern states where the return from cotton this year has been excellent.
Australia: The outlook for cotton area for 1998/99 will be closely linked to both water availability and market price. A combination of relatively high prices, high levels of irrigation water, and good soil moisture levels resulted in a record 430,000 hectares sown in 1997/98. Continued availability of irrigation water depends upon upcoming weather patterns and government water allocation policy, but water supplies are unlikely to improve from the current year's plentiful level. At the same time, world prices have fallen since this year's crop was planted due mainly to the Asian financial crisis, which has sharply reduced import demand from many of Australia's major customers, especially Indonesia. Uncertainty about the Asian crisis and associated price effects give a preliminary area forecast of about 400,000 hectares for 1998/99, close to the level of the 1996/97 crop. Developments affecting production further in the future include the potential construction of two new dams by the Queensland government and the possibility of expansion in the Ord River area, which is in the experimental stages and relies heavily on the success of transgenic cotton.
Turkey: The cotton area for 1998/99 is forecast to move above the 1997/98 level of 700,000 hectares. The increase in area can be attributed to the continued profitability of cotton and the expansion of cotton area under the GAP project. Although cotton is profitable, the area increase could be mitigated as the returns from other crops such as wheat are as profitable and could be favored over cotton, if labor shortages for cotton harvest are anticipated.
Egypt: Cotton area for 1998/99 is forecast unchanged from the previous year at 360,000 hectares. However, the area sown to cotton could change between now and planting time depending upon government policy. With domestic cotton consumption stagnant, ending stocks are expected to increase significantly in 1998/99 from their already high level of 1997/98. In an effort to curb the oversupply of raw cotton, the Egyptian Cotton Export Association has asked the ministry of agriculture to lower the total area planted to cotton in 1998/99 to between 210,000 and 250,000 hectares and reduce the procurement price paid to farmers. In addition to a reduction in planted area, the cotton industry has asked the government to reduce the large stockpile of raw cotton by lowering the sale price of cotton to both local mills and for export.
NOTE: Information in this article is based on field reports received in early January 1998 from U. S. agricultural counselors and attaches, together with information from USDA Washington analysts. Actual area could vary from these estimates for a number of reasons, including government policy changes, weather during the crop season, and price changes for cotton and competing crops. The first official USDA forecast of total cotton area for 1998/99 will be issued in May. Individual country estimates for area, yield, and production will be released in July of this year.
(Ronald R. Roberson, 202-720-0879)