World and U.S. Cotton Situation & Outlook
1998/99: Reduced Production Prospects in the U.S. Results in Lower World Production
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 737,000 bales from last month to 14.3 million bales, as the USDA's first survey-based U.S. crop estimate confirms the effects of adverse weather conditions with the highest abandonment rate since 1933. High abandonment and reduced yield are expected to result in a nine-year U.S. cotton crop low. Production estimates for both Texas and California are significantly below last year, with reductions of 39 percent and 31 percent respectively. Reduced production estimates coupled with smaller beginning stocks are expected to result in increased imports and decreased exports and ending stocks. In addition, the U.S. consumption forecast is lowered an additional 200,000 bales, to 10.8 million bales based on rising textile imports and slower U.S. economic growth. Despite the 4-percent decrease in available supplies from last month, exports are minimally adjusted. Improved crop conditions in California over the past month have raised exportable supplies.
The world outlook for 1998/99 features higher estimated beginning stocks and lower forecasts for production and consumption this month. The significantly reduced U.S. production estimate more than offset increased estimates for Turkey, Australia, and Mali. World consumption is reduced approximately 140,000 bales, reflecting marginally lower mill demand. Net world trade is virtually unchanged, as decreased export estimates for the U.S. and China are met with decreased import demand for raw cotton. World stocks are up slightly from last month at 38.3 million bales as China's 500,000 bale increased stock estimate more than offsets the 400,000 bale decreased estimate for the United States.
1997/98: World Production, Consumption and Ending Stocks Estimate Revised Up
The world production forecast for 1997/98 is raised 395,000 bales to 91.20 million, as increased estimates for Turkey (300,000) and India (100,000) more than offset the decreased estimate for Pakistan (-100,000).
The world import estimate in 1997/98 of 26.94 million bales, is up 120,000 bales, largely due to an increased import estimate for Turkey (150,000). World cotton exports for 1997/98 are essentially unchanged at 26.2 million bales, as the increased export estimate for the United States (100,000) offsets decreased exports for China (-100,000).
The world consumption estimate in 1997/98 of 88.31 million bales, is up 180,000 bales from last month's projection, as increased consumption estimates for Turkey (425,000) and India (200,000) more than offset declines in China (-200,000) and Pakistan (-100,000).
World cotton ending stocks in 1997/98 are estimated at 40.43 million bales, up 320,000 bales from last month's projection as increased world supply more than offsets increased global use. Ending stocks estimates are significantly different for China (+300,000 ) and India (-100,000).
The 1997/98 Cotlook A-Index averaged 69.51 cents/pound during July, over a 1.5-cent increase from June's 67.97 cents/pound. The A-Index began the month on June 26 at 69.9 cents/pound and ended July 30 at 68.15 cents/pound. The African quote was the lowest in the Index, averaging 69.90 cents/pound. During July, the Memphis Territory quote was above the A-index by an average of 12.34 cents/pound, as cotton exports maintained a strong pace and placed pressure on the gap between U.S. and world prices. The October '98 futures prices on the New York Cotton Exchange began the month at 81.11 cents/pound and fell to 71.54 cents/pound on July 31. The December futures also fell more than 6 cents during the month to close at 71.11 cents/pound on July 31.
The seasonally adjusted daily rate of U.S. cotton consumption in June amounted to 41,902 bales, (480-lb), below May's level of 42,756 bales. A total of 1,056,300 bales were consumed during five weeks in June, compared with 886,329 bales in May (4 weeks). The seasonally adjusted annualized consumption rate for the month of June was 10.94 million bales, down from May's 11.16 million bales. Domestic mill buying ranged from very light to moderate for nearby delivery. Light volumes were purchased for first through fourth quarter 1999 delivery. Housewares, such as sheeting and towels, were the top sellers in the retail market. Consumer interest in denim products continued to increase. Many mills closed for the Independence Day holiday, then resumed a five day work week.
Cotton stocks on hand in consuming establishments at the end of June totaled 755,988 bales (480-lb), up from 745,456 bales in May. Stocks held in public storage and at compresses totaled 4.25 million bales, down from 5.59 million in May. Active spindles in place in June 1998 totaled 5.14 million, of which 2.64 million were dedicated to 100-percent cotton, compared with 5.30 million and 2.58 million, respectively, during the same period in 1997. Cotton's share on the cotton spindle system exceeded 78.5 percent.
U.S. cotton exports for May totaled 477,000 480-lb bales, below April's 669,000 bales, and 154,000 bales below May 1997 exports, according to the U.S. Bureau of the Census. The leading markets in May were Mexico, Korea, Japan, and Taiwan.
U.S. cotton imports for May were 10,077 bales, a significant increase above the 447 bales imported in May 1997, according to the U.S. Bureau of the Census. The main source of cotton imports in May was Argentina.
The Step II payment through the week ending August 6 dropped to 5.80 cents/pound - a five-month low. The decrease is partially attributed to a switch from using MY 1997/98 quotes to using MY 1998/99 quotes to calculate the payments. U.S. cotton became more competitive with foreign cotton in July and early August--improved U.S. crop conditions pressured U.S. prices down while, at the same time, crop conditions deteriorated slightly in several foreign countries.
As of July 31, the USDA had processed claims for $356 million in Step 2 payments. Of that total, $224.2 million went to mills, and $132.7 to exporters. Because of a lag in processing applications, Step II payments associated with MY 1997/98 could total nearly $400 million; leaving only $300 million available for MY 1998/99 Step II payments. At an average of 6 cents/pound, the current Step II allocation may not be exhausted until February 1999. However, if the gap between the U.S. and the world price should increase and the payment rate averages 9 cents/pound, the current allocation may be exhausted before 1999.
The Asian Crisis is devastating Indonesia's economy. For twenty-seven years, Indonesia averaged a 7-percent growth rate, but this long growth period has come to a halt. Indonesia's growth rate in 1997 was 6 percent, but the 1998 growth rate is estimated to be a negative 13 to 15 percent. In addition, the rupiah plunged 80 percent this past year while inflation averaged approximately 10 percent during the same period. Indonesia's inflation estimate reached as high as 100 percent in 1998 and there has not been an immediate recovery for the rupiah. Indonesia's financial forecast looks just as bleak as its growth projections. These weak economic conditions are dramatically impacting Indonesia's cotton consumption and cotton imports. Cotton consumption fell from 465,000 metric tons in 1996/97 to 370,000 metric tons in 1997/98 and is expected to decline further to 350,000 metric tons in 1998/99. As cotton consumption decreases cotton imports are also forecast to decline from 375,000 metric tons in 1997/98 to 360,000 metric tons in 1998/99.
For the past decade Indonesia's textile industry experienced expansion due to a long period of economic growth. The number of textile companies grew an average of 2.5 percent over the past five years. However, economic distress has recently hindered Indonesia's vast textile industry. Indonesia's 1996 peak of 2,431 operating textile companies fell in 1997 to 2,010, a 17-percent decrease. Domestic market-oriented textile mills have been hurt more than export oriented mills due to weak domestic textile demand. Indonesian textile mills are facing tough times due to high interest rates of 50 to 70 percent, difficulties opening letters of credit through local banks, increases in the regional minimum wage, and increasing electrical power charges. Cotton spindle utilization has declined partly due to the closing of textile mills. Currently Indonesian spinners are running at approximately 60 percent of full capacity. Indonesia's textile industry has a total capacity of 7.0 million spindles and are only operating 4.0 million spindles.
Manufactured fiber also contributed to the decline in the use of cotton in Indonesia's textile mills this past year. Generally, large textile mills do not frequently switch fiber blends to make yarn. However, strong export demand for manufactured fiber blended yarn forced textile manufacturers to use less cotton. Prices of polyester and rayon fell significantly below cotton in 1997, making it more attractive to financially-stressed spinners.
The United States and Australia compete for Indonesia's cotton market share. Despite the U.S. GSM-102 programs' competitiveness with Australia's EFIC program, Australia was able to obtain 38 percent of Indonesia's cotton market displacing the U.S. as the top cotton supplier in 1997/98. The United States' cotton market share was 36 percent in 1996/97 and fell to 22 percent in 1997/98. Australia's proximity and lower prices partly contributed to Australia's lead in Indonesia's cotton market. Despite market share loss, GSM-102 has helped the U.S. to maintain substantial market share in Indonesia. Indonesia's GSM-102 registrations through the end of July 1998 are approaching $35 million which already exceeds 1997's total of $13 million. Even though Australia's EFIC program is very competitive with GSM-102, Indonesian mills and bankers are more familiar with GSM-102 and prefer it over Australia's program. Unfortunately GSM-102 has been hindered by the limited number of Indonesian banks allowed to participate, and most textile manufacturers cannot meet the 100 percent deposit requirements to open new lines of credit. State-owned banks offer easier requirements to obtain lines of credit, but bureaucratic requirements often result in lengthy delays. Problems using GSM-102 indicates a need to address the obstacles Indonesian importers are facing in order to regain lost U.S. market share. (Celeste Tanner)