World and U.S. Cotton Situation & Outlook
1998/99: Lower U.S. Production Pushes World Production Lower
The U.S. outlook for 1998/99 is for lower production, mill use, exports and ending stocks when compared to last month's estimate. The 1998/99 crop is projected down 700,000 bales from last month to 13.6 million bales, as adverse weather conditions particularly in the Delta and western cotton growing regions push USDA's cotton crop estimate lower. Reduced cotton yields in much of the country along with high abandonment in Texas are expected to result in the smallest U.S. cotton crop since 1989/90. Production estimates for Arkansas, California, Texas and Oklahoma are significantly below last year, with reductions of 32 percent, 38 percent, 41 percent, and 45 percent, respectively. The lower U.S. production estimate coupled with abundant foreign exportable supplies is likely to result in increased imports and decreased exports and ending stocks. In addition, the U.S. consumption forecast is lowered an additional 100,000 bales, to 10.7 million bales based on rising textile imports and slower U.S. economic growth.
The world outlook estimates this month for 1998/99 features higher beginning stocks and lower production and consumption. The lower U.S. production estimate along with lower estimates for China, and Greece, more than offset increased production estimates for Australia and Egypt. World consumption is reduced approximately 265,000 bales, reflecting marginally lower mill demand. Net world trade is virtually unchanged, as decreased export estimates for the U.S. and Greece balance sharply lower imports by China and the Russian Federation and modestly higher U.S. imports. World stocks are down from last month at 37.8 million bales as lower stock estimates for China (-850,000) and the United States (- 200,000) more than offset an increase in the estimate for Australia (204,000).
1997/98: World Production, Consumption and Ending Stocks Estimate Revised Up
The world production forecast for 1997/98 is lowered 81,000 bales to 91.12 million, as an increase in the estimate for Mozambique (55,000) is more than offset by a decrease in the production estimate for Greece (-140,000).
The world import estimate in 1997/98 of 27.12 million bales, is up 175,000 bales, largely due to an increased import estimates for Indonesia (100,000) and Thailand (75,000). World cotton exports for 1997/98 of 26.18 million bales, are down 96,000, as an increase in the export estimate for Mozambique (90,000) is more than offset by lower export estimates for Greece
(-120,000) and China (-66,000).
The world consumption estimate in 1997/98 of 88.40 million bales, is up 86,000 bales from last month's estimate, as increased consumption estimates for Indonesia (100,000) and Thailand (75,000), more than offset declines in Colombia (-40,000) and Mozambique(-40,000).
World cotton ending stocks in 1997/98 are estimated at 40.51 million bales, up 80,000 bales from last month's projection as increased world supplies more than offset increased global use. Ending stocks estimates are significantly different for China (100,000), the United States (-22,000) and Greece (-20,000).
The 1997/98 Cotlook A-Index averaged 68.16 cents/pound during August, over a 1.35-cent decrease from July's 69.51 cents/pound. The A-Index began the month on July 3168.15 at cents/pound and ended August 27 at 68.50 cents/pound. The Chinese quote was the lowest in the Index, averaging 64.98 cents/pound. During August, the Memphis Territory quote was above the A-index by an average of 8.69 cents/pound. The October '98 futures prices on the New York Cotton Exchange began the month at 70.4 cents/pound and rose to 72.11 cents/pound on August 31. The December futures also rose 2 cents during the month to close at 72.08 cents/pound on August 31.
The seasonally adjusted daily rate of U.S. cotton consumption in July amounted to 43,339 bales, (480-lb), above June's level of 42,068 bales. A total of 793,690 bales were consumed during four weeks in July, compared with 1,056,065 bales in June (5 weeks). The seasonally adjusted annualized consumption rate for the month of July was 11.31 million bales, up from June's 10.98 million bales. Domestic mill buying ranged from very light to moderate for prompt nearby delivery. Moderate volumes were purchased for first through fourth quarter 1999 delivery. Consumer demand was good for back to school cotton apparel. Consumer interest in denim products was very good. Demand for housewares declined slightly but remained good. Most mills operated on a five day work week.
Cotton stocks on hand in consuming establishments at the end of July totaled 758,081 bales (480-lb), up from 756,760 bales in June. Stocks held in public storage and at compresses totaled 3.26 million bales, down from 4.24 million in June. Active spindles in place in July 1998 totaled 5.07 million, of which 2.59 million were dedicated to 100-percent cotton, compared with 5.32 million and 2.62 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 June totaled 574,000 480-lb bales, above May's 477,000 bales, but below June 1997 exports of 604,000 bales, according to the U.S. Bureau of the Census. The leading markets in May were Mexico, Turkey, Korea, Japan, and Indonesia.
U.S. cotton imports for June were 106 bales, a fraction of the 10,077 bales imported during the previous month, according to the U.S. Bureau of the Census. Egypt was the only source of cotton imports in June.
US Cotton and Cotton Textiles Trade Encouraged by NAFTA
Cotton exports and textile trade with Canada and Mexico have grown steadily since the North American Free Trade Agreement, or NAFTA passage, with export gains for the United States in both raw and processed products. Mexico has benefitted from higher employment and foreign exchange earnings in the textile and apparel sector.
NAFTA has provided for a transition to lower tariffs on raw fiber exports to Mexico and it has liberalized trade restrictions on processed products such as yarn and fabric. For example, the tariff on raw cotton imported into Mexico is down from 10% (pre-NAFTA) to 5% in 1998. The tariff will be eliminated entirely by 2004. Similarly, US quotas were eliminated for Mexico's exports of yarn, fabric, and apparel produced from yarn from a NAFTA country.
U.S. raw cotton exports to Mexico have achieved noteworthy levels in recent years. Last year, Mexico imported $354 million of U.S. raw cotton. In MY 1997, the U.S. held an estimated 94% of the market share of all cotton fiber imported into Mexico; Mali and Cameroon provided most of the remainder. Many of the textile mills in Mexico are modern operations using equipment geared to the use of High Volume Instrument (HVI) classing information which comes on all bales of U.S. cotton; in some cases, they are using the Engineered Fiber Selection (EFS), an information system developed by Cotton Incorporated. The EFS system helps the textile mill specify cotton properties in their orders and determine optimum "laydown" at the time of purchase. Knowing in advance of opening the bale what fiber properties are present in cotton increases handling and processing efficiency. In comparison with other foreign cotton, US cotton comes into Mexico with a transportation advantage, timely delivery, and with financing options, all helping US fiber to compete successfully in this market. Mexico has been an active user of the GSM-102 and Supplier Credit Guarantee programs. For the first ten months of FY 97/98, registrations under GSM-102 are $137.4 million for raw cotton. The Supplier Credit Guarantee Program has covered $2.2 million in sales of cotton to Mexico over the same period.
U.S. raw fiber exports to Mexico were increasing, with an exceptional dip in MY 1994/95 due to the Mexican peso crisis, in a trend established even before the NAFTA agreement. Since 1995 raw cotton trade with Mexico has been on a steep climb. In MY 1997/98 when US exports to China and the Far East declined, Mexico became the number one export market for US cotton fiber. Although the production of cotton in the U.S. over the 1998/99 season is expected to be the smallest in 9 years due to bad weather, the decreased supply of US cotton available for export is unlikely to affect Mexico's imports. Total Mexican imports of US cotton may exceed one million bales even in this unusual year. The Texas cotton harvest alone, which should surpass 3 million bales even after suffering the serious effects of drought, will continue to offer the styles of cotton fiber for Mexico's import needs. Mexican imports over the current marketing year are forecast to be approximately 1.5 million bales.
While NAFTA provided for liberalized trade and reinforced the trend in raw cotton fiber exports and textiles, it is not possible to single it out as the only influence on trade in these products. Canada, Mexico, and the United States all underwent transformations in domestic agricultural policy and other economic changes over these years. Mexico and the U.S., of course, are the only cotton producers among the three member countries.
It is evident that NAFTA has stimulated textile and garment manufacturing investment in Mexico. The Mexican textile industry experienced at best stagnant and sometimes negative growth rates under older, pre-NAFTA policies of import substitution and protectionism. This was the case throughout the 1980's and even into the early 1990's. The 1994 decline is a reflection of the currency devaluation. The line graph below shows the growth rate, measuring output of the Mexican textile industry according to Mexico's National Textile Industry Chamber (CANAITEX). Many of Mexico's small, inefficient mills have gone out of business while mid-size and large mills have purchased new equipment and modernized. CANAITEX also reports that 1997 textile machinery and equipment imports increased 85.2 percent compared to 1996. This organization also states that cotton fiber is 46.3 percent of all fiber consumed in Mexico.
NAFTA and another important regional American agreement, the Caribbean Basin Initiative (CBI) have both profoundly affected the textile sector, effectively moving some textile manufacturing into North America (including the Caribbean and Mexico) and away from the Far East and other locations, by virtue of tariff and quota advantages. (See Cotton: World Markets and Trade, April 1998.)
The CBI guaranteed access limits, however, do not compare with Mexico's advantages through NAFTA. NAFTA gives duty-free and quota-free treatment to U.S. formed and cut fabrics sewn in the Mexican maquilas, or apparel assembly operations. CBI access limits, by contrast, benefit the CBI countries with reduced duties and preferential quotas. CBI's section 807 allows Caribbean countries to have a more liberal quota system for apparel items to access the US market if the fabric is produced and cut in the US.
The good news to U.S. producers of cotton fiber is that although textile imports from our NAFTA partners are increasing, they contain significant amounts of U.S.-grown fiber. The data presented below update and confirm a trend studied by USDA's Economic Research Service *, which tracked cotton content in products traded among NAFTA partners. Data represent an aggregate of yarn, thread, fabric, apparel, and household furnishings. Calendar 1998 U.S. cotton textile imports from Mexico are projected to be more than five times the pre-NAFTA (1993) level. While Mexico occupied sixth place among sources of U.S. textile imports prior to NAFTA, it is now number one, holding more than double the share of its nearest competitor, India. Mexico holds first place both as an exporter and as an importer in textile trade with the United States, partly thanks to NAFTA.
*NAFTA's Effect on U.S. Cotton Textile Trade: The First Four Years by Leslie A. Meyer, USDA/ERS 1997
(Prepared by Ann Murphy)
Francophone Africa: Over the past 15 years, the 10 cotton producing countries of West (or Francophone) Africa have increased cotton exports by 3-fold, and increased their world market export share by 10 percent. Francophone Africa is projected to account for 14.5 percent of the world's cotton exports in 1998/99, with total exports of 3.73 million bales. This makes the region the third largest exporter of cotton. While 1998/99 export estimates for the world's two largest exporters, the United States and Uzbekistan, have decreased, Francophone cotton is expected to maintain its export levels due to price competitiveness and an abundant crop.
The increase in Francophone exports has been led by production increases in the major producing countries of the region. Over the past 5 years, production in Mali, Cote d'Ivoire, Chad, Benin and Burkina Faso, which represent over 80 percent of Francophone's exports, has increased by approximately 50 percent. While the rate of increase over the past year has slowed to less than 2 percent, there are a number of developments which could influence cotton production in the region over the next decade.
In contrast to the increase in production, domestic consumption of cotton in Francophone Africa has grown by less than 100,000 bales over the past 15 years. This has resulted in the export of nearly 90 percent of production. The likelihood of increased domestic consumption in the region is limited. However, Nigeria, Africa's most populous country, consumes more cotton than all 10 Francophone countries combined. A recent article in the Washington Post (August 30, 1998) quoted Mamadou Toure, a retired director of the International Monetary Fund, as saying that economic advancement of W. Africa is dependent on Nigeria. There is a growing confidence that Nigeria will return to civilian government, which, according to Mr. Toure, could foster economic development of the region.
Modernization of Nigeria's economy has the potential to expand trade opportunities for the Francophone countries; at the same time, the Clinton administration has proposed a bill to boost economic development of the region. The Africa Growth and Opportunity Act, passed by the U.S. House of Representatives, would grant Sub-Saharan African countries quota and tariff-free access to the U.S. textile market. However, the U.S. cotton industry has raised concerns about the potential for transshipment of fabric from Asia. As a result, the Senate Finance Committee passed a version of the Bill which would require that U.S. fabric and yarn be used in order to receive benefits under the Bill. The final outcome of the Bill is uncertain, as it has been tied to trade legislation being considered in the Senate.
Another factor affecting the future of the industry is the impact of privatization of the parastatal cotton companies in Francophone Africa. These parastatals, such as CIDT (la Compagnie Ivoirienne pour le Developpement des Textiles) in Cote d'Iviore, are vertically integrated businesses which provide credit, seed and inputs, and gin, transport and market cotton produced on generally small plots. The parastatal companies are in various stages of privatization, under the encouragement and financial support of The World Bank. While a World Bank study suggests that cotton production could increase by more than 50 percent if the parastatals were privatized and farmers received near world market prices, in the short term production could stagnate due to the uncertainty associated with new ownership and a potential disruption of services provided. (Prepared by Andy Levin)