World and U.S. Cotton Situation & Outlook

1998/99: U.S. Cotton Consumption and Export Projections Lowered from Last Month and China Emerges
as a 1 Million Bale Net Exporter

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 500,000 bales from last month to 15 million bales, due to continued adverse weather conditions in Texas and the Southeast. This production-driven tightening of supplies coupled with rising textile imports has caused this month's U.S. 1998/99 consumption forecast to be lowered 200,000 bales, to 11 million bales, a 4 percent decrease from the 1997/98 level. Tighter supplies, lower world consumption, and the expected termination of Step 2 payments are major factors affecting the 1998/99 export forecast, currently at 5 million bales, 10 percent below last month and 33 percent below the 1997/98 level. Although traditional US cotton competitors are expected to have adequate supplies to provide the international market, China's emergence as a one million bale net exporter is expected to prevent them from increasing market share.

The world outlook for 1998/99 features higher estimated beginning stocks and lower forecasts for consumption this month. World consumption is reduced approximately 1.2 percent from the June estimate as yarn inventories increase and growth in demand slows. With production and trade virtually unchanged, world stocks are up nearly 7 percent from last month at 38.0 million bales.

Despite higher world beginning stocks, due mainly to 1997/98 ending stocks increases for India and China, 1998/99 world ending stocks are expected to decline significantly. World stocks in MY 1998/99 are expected down 2.1 million bales, as a 2 million bale decreased estimate for China and a 950,000 million bale decreased estimate for the United States more than offset the expected 1 million bale increase in foreign stocks (excluding China). China's expanded trade is expected to force foreign countries outside China to hold stocks, while the United States is minimally affected due to the significant decrease in supplies.

1997/98: World Production and Ending Stocks Forecast Revised Up

The world production forecast for 1997/98 is raised 825,000 bales to 90.80 million, led by a 700,000 bale increased estimate for India. Changes in India coupled with increases in Argentina, Turkey, Greece, and Pakistan more than offset the decreased export estimate for Mali and Uzbekistan.

The world import estimate in 1997/98 of 26.82 million bales, is up 177,000 bales as the decreased import estimate for India - resulting from increased production - was more than offset by an increased estimate for Brazil. World cotton exports for 1997/98 are essentially unchanged at 26.2 million bales.

The world consumption estimate in 1997/98 of 88.13 million bales, is down 290,000 bales from last month's projection, mostly due to declines in China (-300,000), India (-200,000), and Thailand (-100,000).

World cotton ending stocks in 1997/98 are estimated at 40.1 million bales, up 1.5 million bales from last month's projection due to higher beginning stocks, production, and imports and lower consumption and loss. Ending stocks estimates are significantly higher for India (+675,000 ) and China (+300,000). Beginning stocks are revised up, due to prior year adjustments in a number of countries.

Cotton Prices

The 1997/98 Cotlook A-Index averaged 67.97 cents/pound during June, more than a three cent increase from May's 64.48 cents/pound. The A-Index began the month on May 29 at 66.55 cents/pound and ended June 25 at 69.80 cents/pound. The Central Asian quote was the lowest in the Index, averaging 66.83 cents/pound. During April, the Memphis Territory quote was above the A-index by an average of 12.43 cents/pound, as strong cotton exports and steady consumption tightened US cotton supplies. July '98 futures prices on the New York Cotton Exchange began the month at 73.59 cents/pound and rose to 81.80 cents/pound on June 30. The December futures also rose approximately 3 cents during the month to close at 77.54 cents/pound on June 30.

U.S. Highlights

The seasonally adjusted daily rate of U.S. cotton consumption in May amounted to 42,814 bales, (480-lb), above April's level of 42,500 bales. A total of 855,004 bales were consumed during four weeks in May, compared with 839,114 bales April (4 weeks). The seasonally adjusted annualized consumption rate for the month of May was 11.17 million bales, up from April's 11.09 million bales. Domestic mill buying was light, since many mills reportedly had their needs covered through the summer months. A light volume of cotton was purchased for fourth quarter 1998 through fourth quarter 1999. Domestic mill use of fine count yarn was good to heavy, while use of coarse yarns was light to moderate. Consumer interest in housewares remained strong. Sales of children's apparel, infant wear, and summer teen apparel were moderate to good. Consumer interest in denim products were good, attributed mostly to increased interest in women's denim apparel. Most mills operated a five day work week.

Cotton stocks on hand in consuming establishments at the end of May totaled 745,371 bales (480-lb), up from 732,685 bales in April. Stocks held in public storage and at compresses totaled 5.59 million bales, down from 6.83 million in April. Active spindles in place in May 1998 totaled 5.17 million, of which 2.61 million were dedicated to 100-percent cotton, compared with 5.29 million and 2.57 million, respectively, during the same period in 1997. Cotton's share on the cotton spindle system exceeded 78 percent.

U.S. cotton exports for April totaled 669,000 480-lb bales, above March's 888,000 bales, and 42,000 bales below April 1997 exports, according to the U.S. Bureau of the Census. The leading markets in April were Mexico, Korea, Turkey, and Indonesia.

U.S. cotton imports for April were 196 bales, compared with 453 bales in April 1997, according to the U.S. Bureau of the Census.

Feature Article

Step 2 Payments High and Running Out in MY 98/99

By Ann Murphy

Because cotton program funding is capped and the expenditures on the weekly Step 2 payments remain high, funds available for the upland cotton Step 2 program are likely to run out before January 1999. The high Step 2 payments have implications for export sales, especially in the next six months. The demise of the pool of available funds has negative implications for exports and an impact on all segments of the industry for MY 98/99. The competitive situation of U.S. cotton in MY 98/99 (Aug - July) will be affected by a short 98/99 harvest and by the end of funding for Step 2. The incentive for export merchants to take advantage of the payments before the funding is exhausted will stimulate exports in the beginning of MY 98/99. Once Step 2 funds end, there will likely be announced a long series of Step 3 import quotas. The quotas will be viewed by growers as exacerbating an already bleak price and income situation. Legislative change would be required to provide additional Step 2 funds.

The short crop in the US and a reversal of the China cotton situation from that of a net importer to a net exporter have altered the market picture and caused high Step 2 payments. Over the summer and into the fall there will be a race to capture the high Step 2 payments while they are still available. This may push up US export sales and shipments at the end of this marketing year and into the beginning of MY 98/99 when they normally would reach a plateau. Current premiums in October futures relative to December are indicative, in part, of competition for early harvested 1998 crop cotton in order to capture the remaining Step 2 payments.

In 97/98, Step 2 payments are estimated to total about $150 million on export shipments, adding 350,00 to 550,000 bales to export shipments, now estimated at 7.4 million bales for this marketing year. The payment rates will average about 4 cents per pound for the 1997/98 crop. Step 2 payments to US mills will have reached $248 million by the end of July. Payments to US mills will have totaled about $250 million by the end of July.

OUTLAYS

At the time the FY 99 President's budget was written estimates of the Step 2 payments projected them to be $200 million, assuming a world supply and use situation for 98/99 which is no longer applicable. Projecting expenditures to the last week of MY 97/98, Step 2 will have used about $400 million. Based on the USDA July estimates of the world cotton supply and demand situation, and assuming a Step 2 payment of an avenge of 12.5 cents until July 31, then 11 cents as MY 98/99 begins, the entire authorized amount of $701 million for Step 2 would be spent by about the first week of December 1998. With more conservative assumptions on the rate of Step 2 for MY 1998/99, it could last into February 1999. Both mill use and exports of U.S. cotton are likely to be weaker without Step 2.

The graph shows estimated expenditures made to mills and exporters under the Step 2 program. The authorizing legislation for the upland cotton Step 2 program, the Federal Agriculture Improvement and Reform Act of 1996 (1996 Act) took effect in April 1996. However, Step 2 payments under the 1996 Act did not begin until July, 1997 because Step 3 was in effect. Under the rules at that time, Steps 2 and 3 could not operate simultaneously. The 1996/97 outlays for Step 2 were modest.

SUMMARY OF MY 97/98 MARKET CIRCUMSTANCES AND IMPACT ON STEP 2 ACTIVITY

The Step 2 Program is designed to price US cotton back into the market when it is out of line with world prices as measured in the A-Index. The tighter the U.S. supply/use situation in relation to that of the rest of the world, the higher the Step 2 payment rate is likely to be. In MY 97/98 the following events describe the course of Step 2 activity over MY 97/98. As world prices dropped and the US price rose, this widening gap translated into high Step 2 expenditures.

WHAT WILL HAPPEN NEXT?

There is little likelihood that Step 2 payments will be available to assist with marketing of the MY 98/99 US crop when the new foreign crop comes onto the market in March and April of 1999. The market situation projected for 1998/99 is now widely portrayed by analysts in the cotton industry as one in which the United States will be short cotton, and the rest of the world will be long. Reduced production in the US, combined with the loss of Step 2, will reduce US export competitiveness.

Exporters sold a large amount of US cotton in 97/98. Shipments of upland cotton by the end of MY 97/98 will total around 6.9 million bales. Sales often were made under agreements which provided part of the Step 2 payment to the foreign buyer. Exporters already have sold 1.5 million bales of new crop cotton, some of which will have been sold with a Step 2 payment assumed or promised to the buyer. Exporters are now keenly interested in the likely termination date for Step 2 so they can avoid making commitments that factor in a payment which may not be forthcoming. Thus, export activity in 1998/99 will be accelerated prior to termination of Step 2 in the first months of the marketing year, and once Step 2 is exhausted it may well dwindle.

STEP 3 IMPORT QUOTAS ARE LIKELY TO REAPPEAR

The circumstances which will bring about the exhaustion of funding for Step 2 will also be those which are conducive to the triggering of Step 3 import quotas. Step 3 is invoked if the US price quotation, C.I.F. northern Europe, has exceeded the A-Index by more than 1.25 cents for 10 consecutive weeks, less the amount of any step 2 payment made in the preceding week. Upon expiration of Step 2, the US price quotation will have exceeded the "A" Index by much more than 1.25 cents for about 18 months. There has been no Step 3 quota triggered since the Step 2 program resumed in July 1997, even though the U.S. quotes exceeded the "A" Index by an average of more than 5.25 cents throughout that period, because of the Step 2 payment offset in the Step 3 trigger formula. When the Step 2 funding is exhausted, there can be no such adjustment to the U.S. northern Europe quotation. Thus, depending upon the count of weeks at the date on which Step 2 terminates, the Step 3 import quotas would probably begin to be announced between one and ten weeks later.

The prospect of Step 3 quotas is viewed with alarm by growers and with eagerness by textile manufacturers. The U.S. mills view Step 2 as their means of remaining competitive in world textile trade, and they regard the ability to import cheaper foreign cotton under Step 3 as a reasonable substitute for Step 2 payments. In the event of a very short US supply in 1998/99, mills would welcome the assistance that imports may provide. (Ann Murphy)

Last modified: Tuesday, August 30, 2005