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World and U.S. Cotton Situation & Outlook
World and U.S.
1998/99: U.S. Cotton Consumption and Export Projections Lowered from Last Month
The U.S. outlook for 1998/99 is for lower production, mill use and exports relative to last month. The 1998/99 crop is projected down 1 million bales from last month to 15.7 million, due to adverse early season weather conditions in California and Texas. Dryland acreage in west Texas is suffering due to lack of rain. Of the 5.6 million acres planted to cotton in Texas, nearly two-thirds are unirrigated. The lack of rain is expected to affect yields and result in a higher rate of abandonment on the dryland acreage. Conversely, excess rain in California has delayed planting and cool weather has hindered plant progress which may reduce yields. The National Agricultural Statistics Service (NASS) crop progress report released May 26 stated that California's crop was 92 percent planted against 99 percent planted on average over the last five years. More significantly, in a June 8 NASS report, 80 percent of the cotton crop in California was rated "poor" or "very poor" condition.
This production-driven tightening of supplies has caused this month's U.S. 1998/99 consumption forecast to be lowered to 11.2 million bales. Although cotton consumption has been strong over the current year at 11.4 bales, this will soften once the effects of shrinking supplies, higher prices, and textile imports are factored into buyers' demand for cotton. Tighter supplies and greater foreign competition will impact exports, now estimated for 1998/99 at 5.6 million bales. Ending stocks are projected at 2.9 million bales, down 100,000 bales from last month and equal to 17.3 percent of total use.
USDA's revisions of world cotton supply and use for MY 1998/99 are mostly due to revised U.S. forecasts. The world production forecast is unchanged from last month at 86.5 million bales, as lower U.S. production is offset by higher foreign production. World imports are also unchanged at 26.5 million bales. World consumption is down 500,000 bales from last month at 89.5 million, due to lower U.S. mill use and delayed recovery in Southeast Asian economies. World stocks are higher due primarily to higher beginning stocks resulting from an adjustment in India's 1996/97 consumption.
1997/98: World Production Forecast Revised Up, U.S. Consumption Down
The U.S. consumption estimate for 1997/98 is lowered 100,000 bales to 11.4 million, and the export estimate lowered 150,000 bales to 7.35 million, due to slower rates of activity. These revisions increase the ending stock estimate to 4 million bales, or 21 percent of total use.
The estimate for world production in 1997/98 of 90 million bales is up 1.35 million bales from last month's estimate, led by a rise of 1.4 million bales in China's crop estimate. The estimate for Argentina's crop was lowered another 200,000 bales to 1.2 million, as excess rain continues to lower crop prospects. Production estimates for Burkina Faso and Zambia were increased by 135,000 bales and 100,000 bales, respectively.
World consumption estimate in 1997/98 of 88.42 million bales, is down 130,000 bales from last month's projection, mainly due to the drop in U.S. consumption.
World cotton exports for 1997/98 are essentially unchanged at 26.1 million bales. World imports are expected to be down almost 400,000 bales, mostly due to declines in India (-300,000) and Pakistan (-100,000).
World cotton ending stocks are estimated at 38.6 million bales, up 1.6 million bales from last month's projection due to higher beginning stocks and production and lower consumption. Beginning stocks are revised up due to an adjustment in India's 1996/97 consumption. Compared to last year, world 1997/98 ending stocks are up 1.8 million bales.
The 1997/98 Cotlook A-Index averaged 64.48 cents/pound during May, down one cent from April's 65.48 cents/pound. The A-Index began the month at 63.70 cents/pound and ended May 28 at 65.55 cents/pound. The Central Asian quote was the lowest in the Index, averaging 60.42 cents/pound. The introduction of the Chinese quote and the resulting elimination of the Australian quote from the index on June 3 helped to lower the index level. During April, the Memphis Territory quote was above the A-index by an average of 8.37 cents/pound. July '98 futures prices on the New York Cotton Exchange began the month at 65.16 cents/pound and rose to 70.59 cents/pound on May 29, as reports of reduced U.S. acreage and poor weather in California and Texas lowered expectations for the upcoming crop. The December futures also rose approximately 4 cents during the month to close at 73.26 cents/pound on May 30.
The seasonally adjusted daily rate of U.S. cotton consumption in April amounted to 42,056 bales, (480-lb), below March's level of 43,006 bales. A total of 861,835 bales were consumed during four weeks in April, compared with 1,107,125 bales in March (5 weeks). The seasonally adjusted annualized consumption rate for the month of April was 10.98 million bales, down from March's 11.22 million bales. Domestic mill buying was active, with moderate purchases for fourth quarter 1998 through fourth quarter 1999 delivery. Demand for fine count yarns was strong, while demand for coarse count yarns was excellent. Consumer demand for cotton textile goods remained excellent. Sales of housewares remained excellent. Sales of children's apparel, infant wear, and summer teen apparel remained strong. Consumer interest in denim products increased steadily. Most mills operated a five day work week.
Cotton
stocks on hand in consuming establishments at the end of
April totaled 733,640 bales (480-lb), up from 703,181 bales in
March. Stocks held in public storage and at compresses totaled
6.88 million bales, down from 8.23 million in March. Active
spindles in place in April 1998 totaled 5.4 million, of which 2.6
million were dedicated to 100-percent cotton, compared with 5.7
million and 2.5 million, respectively, during the same period in
1997. Cotton's share on the cotton spindle system exceeded 78
percent.
U.S. cotton exports for March totaled 888,000 480-lb bales, above February's 777,000 bales, and 40,000 bales above March 1997 exports, according to the U.S. Bureau of the Census. The leading markets in March were Mexico, Korea, Japan, Turkey, and China.
U.S. cotton imports for March were zero, compared with 2,000 bales in March 1997, according to the U.S. Bureau of the Census.
Feature Article
China: A Rapidly Changing Environment for Cotton
By Jon Ann Flemings
Since MY 1993/94, China has been the world's largest importer, the largest market for U.S. cotton, and an insignificant cotton exporter. During recent months, the government of China (GOC) implemented a series of policy changes aimed at reducing cotton imports and increasing the use of domestic cotton: (1) domestic procurement prices were reduced; (2) value-added tax rebates were increased; and (3) cotton imports were discouraged through the use of stringent import licensing requirements. As a result, China's cotton imports are expected to drop to 1.8 million bales, a 50 percent decrease from the previous season. An additional surprise to the world cotton market has been China's mid-April sale of nearly one million bales of cotton. China's abrupt decrease in cotton imports coupled with increased exports is causing disruption in the world cotton market.
The government of China (GOC) considers cotton vital to its national economy. Therefore, its production, disposition and trade are under strict government control. Due to a large drop in production, China's cotton stocks fell precipitously in 1993/94, resulting in a need to enter the cotton market as a major importer. Between 1993/94 and 1997/98, cotton imports averaged 3.6 million bales and cotton stocks rose approximately nine million bales as the GOC procured cotton from farmers at higher-than-world market prices, and domestic mills relied on less expensive imported cotton. Although adequate stocks were important to China's policy of self-sufficiency, storing large quantities of cotton proved expensive - information from Chinese officials indicates that the cost is at least $400 million per year. Therefore, the GOC reversed its policy and began limiting cotton imports and reducing cotton stocks.
Factors Affecting Cotton Imports
During the past 4 years, cotton import regulations were relaxed and domestic mills were encouraged by the government to import cotton for textiles produced for export. Prior to the implementation of China's new import quota system, import quotas were not necessary for joint-venture mills. Established exporters, including state-owned and joint-ventures, were not required to pay import taxes. Also, taxes were levied on firms which failed to prove that finished goods produced of imported cotton were exported within 6 months. Some state-owned mills, being unable to purchase the lower-priced imported cotton, established false joint-ventures, creating a "black market" for cotton. Reportedly, many of these establishments were discovered and shut-down during late 1997. The existence of this "black market" is apparently taken into account by the government, resulting in strict disbursement of the 1998 import permits or quota allocations.
Although there is little transparency in China's new import quota system, all the mills visited during April are required to submit a request for each incoming shipment and, once eligibility is determined, quotas appear to be issued according to these requests. To be eligible for a cotton import quota allocation, part of the criteria is to prove: (1) profitability; (2) efficiency; (3) an intention to export the final product; and (4) that all previously imported cotton has been exported as a processed product or taxed accordingly. Obtaining import quotas for cotton purchased under contracts signed prior to January 1, 1998, appears to be less restricted.
The fact that import levels have exceeded the gap between consumption and production, has forced the GOC to react by reducing procurement prices and limiting imports - adversely affecting both domestic cotton producers and textile mills alike. Reduced procurement prices are threatening the livelihood of Chinese cotton farmers, at the same time that mills are being forced to pay higher prices for domestically produced cotton. Since the demand for synthetic fibers is positively correlated to the price of cotton, production of synthetic fibers is rising.
Although China has attempted to reduce imports in the past, the recent restrictions appear to be more effective than previous attempts. The government of China has valid financial and economic reasons to limit imports, but its methods conflict with their goal of joining the World Trade Organization. There is little evidence that China will release the current restrictions on imports any time in the near future. In the long-term, with possible decreases in production (which may result if procurement prices continue to decrease), and reduced stocks, China could regain its status as a major cotton importer.
Factors Affecting Cotton Exports
China's textile industry has become the target of major reform. Out-of-date spindles are being destroyed while inefficient mills are being closed. The workforce is also being trimmed increasing the short-term cost to the government through buyouts and unemployment. As the GOC draws down its state cotton reserves, the mills are being forced to either pay some of the storage costs themselves or rely on more hand-to-mouth delivery, which could increase their demand for local cotton. In the immediate future, China will continue to export until stocks are again at acceptable levels.
Will China Continue to Export Significant Quantities of Cotton?
China plans to reduce stocks and move toward a more market-responsive cotton industry. China's recent announcements that the price of domestic cotton will be allowed to fluctuate, and cotton procurement prices for 1998/99 will be lowered, are evidence that China is attempting to bring domestic cotton prices closer to world prices. China's 1998 procurement prices - ranging between $.66 and $.71 cents/lb - are down substantially from the 1997 procurement prices - which ranged between $.71 - $.77 cents/lb. In the past, China's cotton pricing policy operated to support production and farmers' income rather than reflect market equilibrium prices.
Since China's consumption may continue to exceed its production, China is likely to export cotton only until its excess stocks are eliminated. However, China's surplus is too large to be drawn down in a single year. The current supply of Chinese cotton on the market does not compete directly with U.S. cotton because of quality deterioration due to age. However, future Chinese exports could be comprised of higher-quality cotton and compete with cotton from all sources.
International Highlights
The outlook for a near term recovery of the cotton textile industry in Southeast Asia continues to be uncertain. Cotton imports are expected to fall by 18 percent from the 1996/97 marketing year, representing a decrease in world cotton imports of 2 percent. Indonesia is the world's second largest importer and the largest importer in the region, and is estimated to experience decreased cotton imports of approximately 450,000 bales.
According to FAS/Jakarta, total cotton imports may decrease by up to 30 percent from levels last year due to problems in opening Letters of Credit to finance cotton imports, high interest rates of up to 50 percent, closures of many small and medium size mills, and higher utilization of man-made fibers. Several large and medium size textile mills have increased their textile exports from 60-70 percent of their total output to nearly 100 percent, as the domestic textile demand has virtually ceased.
A number of economic forecasts indicate a significant decline in domestic demand; investment house Salomon Smith Barney recently forecast a 14 percent contraction this year in Indonesia's economy. While Indonesia yarn exports are reported to be running ahead of last year, the Secretary-General of the Indonesian Textile Association was quoted in an international news report as saying that new orders for textile products and garments had stopped in April. Bisnis Indonesia newspaper reported that $1.2 billion in textile orders had been canceled with earnings from Indonesian textile exports slipping below a $9 billion target.
Cotton imports from August 1997 through February 1998 totaled 1.13 million bales, with February imports of about 110,000 bales. Imports for December 97 through February 98 have fallen by 36 percent from the previous two months, which indicates that Indonesia's total imports will likely not exceed 1.7 million bales. Australia has become Indonesia's number one cotton supplier, and exports from August 1997 through April 1998 have reached nearly 500,000 bales. One of the largest Australian marketers expects to ship an additional 100,000 bales over the months of May and June. Southeast Asian mills have reduced inventory stock by one month or more in order to reduce inventory costs, which has given Australian cotton an advantage over other cottons due to timeliness of delivery.
U.S. cotton exports to Indonesia have reached 440,000 bales, with additional sales of 80,000 bales. It is expected that Australia's market share will grow from 26 to 35 percent this marketing year, while U.S. market share will grow by a modest 2 percent and reach 26 percent. It is unclear if the Australia export credit program (EFIC) has been effective as Indonesian banks still have difficulty in issuing letters of credit and reportedly only a few firms have processed EFIC guarantees. While EFIC may have enjoyed an advantage because it was based on CNF value, USDA recently announced that freight coverage is now available under GSM-102 to Indonesia. This change may increase U.S. cotton exports, which have a current registration of $29.5 million. (Andrew Levin)
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