U.S. Cotton Outlook
The 1998/99 U.S. outlook this month includes no changes from the previous months estimate.
The 1999/2000 U.S. forecast features higher production and exports, unchanged consumption, and lower ending stocks compared to last month. The production forecast was increased 101,000 bales to 16.5 million, based on a crop production survey by NASS which indicated higher yields in the Delta and Far West, partially offset by lower yields in the Carolinas. Both consumption and export forecasts were adjusted in part as a result of re-authorization of Step 2 funding. While consumption was unchanged, the export forecast was raised 200,000 bales to 5.7 million. Ending stocks were reduced 100,000 bales to 4.6 million bales resulting in a stocks-to-use ratio of 28.9 percent.
World Cotton Outlook
The 1998/1999 world outlook this month includes a slight increase in production and a modest increase in consumption, trade, and ending stocks. Ending stocks are forecast up 180,000 bales resulting in a world stocks-to-consumption ratio of 49.4 percent.
The 1999/2000 world forecast features a significant increase in production, and modest increases in consumption, exports, and ending stocks. The increased production was the result of increases in Uzbekistan, India, Pakistan, Turkmenistan and the United States. Ending stocks decreased 405,000 bales resulting in a world stocks-to-consumption ratio of 47.1 percent.
Cotlook A Index: The A-Index, a principal measure of international cotton prices, represents an average of the five lowest quotes of cotton for delivery to Northern Europe ports. During October, quotes of Greek, Spanish, Uzbekistan, Syrian, and African Franc Zone cotton were included in the Index. The Index averaged 47.44 cents per pound during the period, a 1.91-cent decrease from Septembers 49.53 cents per pound average. The Syrian quote was the lowest in the Index over the four week period, averaging 46.54 cents per pound. On November 4th, the A-Index dropped further to 46.85 cents per pound as competition among exporting countries intensified.
Futures Prices: U.S. cotton futures prices represent the current price of U.S. cotton for delivery at a future date. During October, U.S. cotton futures prices drifted lower due to speculative selling and the delayed presidential approval of the FY2000 Agriculture Appropriations Bill. On Thursday November 4th , the December 99 cotton contract settled at 51.72 cents per pound, and the March 2000 contract at 53.35 cents per pound.
U.S. Cotton Highlights
Cotton Consumption: The seasonally adjusted daily rate of U.S. cotton consumption in September amounted to 37,715 bales (480-lb), compared with Augusts level of 37, 930 bales. A total of 977, 008 bales were consumed during five weeks in September, compared with 792,327 bales in August (4 weeks). The seasonally adjusted annualized consumption rate for the month of September was 9.84 million bales, down from Augusts 9.90 million bales.
Domestic mills purchased a light to moderate amount of cotton for prompt through third quarter 2000 delivery. Demand was good for color 41 and better, leaf 4 and better, staple 34 and longer, and mike 35-49. Some mills were renegotiating or canceling previously contracted southeastern- and delta-grown cotton because of its short staple length. Others continued to make conversions that would allow them to run the shorter staple cotton. Some San Joaquin Valley- and West Texas-grown cotton have replaced canceled contracts. Demand for fine and coarse count yarns was light to moderate. Consumer sales of housewares, teen apparel, mens knitwear and hosiery were moderate, and denim was light. Mill sales of specialty yarns were good; gray cloth was light; domestic denim fabrics and print cloth were very light. Most mills operated on a five- to six-day week.
Cotton stocks: U.S. cotton stocks on hand in consuming establishments at the end of September totaled 559,263 bales (480-lb), down from 588,263 bales in August. Stocks held in public storage and at compresses in September totaled 3.99 million bales, up from 2.94 million bales in August. Active spindles in September totaled 4.60 million, of which 2.4 million were dedicated to 100-percent cotton. This compares with 5.08 million active spindles of which 2.6 million dedicated to 100-percent cotton in September 1998 . Cotton's share on the cotton spindle system was 78.4 percent in September.
U.S. cotton exports for August totaled 254,000 (480-lb) bales, down 2.7 percent from July and 63.2 percent below August 1998 exports. The leading markets in August were Mexico, Indonesia, Japan, Korea, Taiwan, Hong Kong and Canada.
U.S. cotton imports in August totaled 35,700 bales, down 55.7 percent from July. According to data from the U.S. Bureau of the Census, there were no imports for August 1998. The leading supplier was Syria, with modest imports from China and Greece.
World Cotton Highlights
Market reports received from U.S. agricultural attaches posted overseas in the last month note increased production forecasts for Uzbekistan, India and Pakistan, and a modest production decline for Paraguay. An update was provided on Chinas production and market reforms. These recent reports are available through the FAS homepage at www.fas.usda.gov.
KEYNOTE ADDRESS TO THE PLENARY MEETING OF THE INTERNATIONAL COTTON ADVISORY COMMITTEE
Address given by FAS Associate Administrator Patrick M. Steel in Charleston, SC, on October 25, 1999 (edited).
Its an honor to present the keynote address before such a distinguished audience of private industry, trade, and government officials representing the full scope of the international cotton industry. I want to thank all of the elements of the U.S. cotton industry and in particular, South Carolinas producers and ginners for sponsoring this conference.
A History of Relationships and Partnerships
The city of Charleston, S.C. enjoys a special relationship with cotton. Here cotton is grown, ginned, shipped as fiber, and manufactured into textile products. The famed extra-long staple "Sea Island Cotton," one of the finest varieties ever grown, originated on the islands right off the Carolina coast.
As in many countries, cotton has had a major impact on U.S. history and culture. Cotton became "King" Cotton in 1783, when Eli Whitney invented the cotton gin to pull the fibers from the seed, making the crop truly profitable. By 1810, it had begun to supplant tobacco as the Souths principal cash crop. Today, cotton remains to textiles what iron is to metals a component essential to many finished products. In many ways, cottons popularity for clothing, linens, and a variety of other uses is blooming as never before.
The United States congratulates the ICAC on its 60th anniversary. The ICAC is the outgrowth of an International Cotton Meeting attended by 10 cotton-producing countries held in Washington, DC in September 1939. At that time, world stocks of cotton had reached nearly 25 million bales -- over half of it in the United States. That meeting was held to discuss problems of over-production, rising stocks, and falling prices.
Today, ICAC members face some of the same problems faced 60 years ago, as well as new challenges which bring us to a critical point in our efforts to promote a sound, global cotton economy. Overcoming stagnant global demand and challenging synthetic fibers increasing market share will be the paramount challenges to the worlds cotton industry well into the next millennium. And we believe that these challenges can be met only by tapping the creativity, resources, and experience of private industry.
U.S. Cotton Industry: Situation and Outlook
U.S. agriculture has been hurt by the combined effects of the Asian financial crisis, which cut world economic growth; by burgeoning commodity supplies; and by sharply lower prices. Last years cotton crop was about 25 percent below the previous 5-year average. Our textile industry has faced a flood of cotton textile imports, which reached the equivalent of 12.5 million bales last year, while our fiber exports dropped by 3 million bales. Our industry has lost export markets, especially in China, where sales dropped from $813 million in fiscal 1995 to what will amount to less than $25 million in fiscal 1999. Recently, Hurricane Floyd wrought further havoc: in North Carolina alone, cotton crop damage is estimated at $190 million.
The USDA-Industry Partnership
Meanwhile, USDA is helping the U.S. cotton industry weather the times. USDAs Foreign Agricultural Service (FAS) serves U.S. agricultures international interests by expanding export opportunities for farm, fish, and forest products and promoting world food security. FAS has had a long partnership with U.S. agriculture and the U.S. cotton industry. From Washington and offices in 130 countries around the world, FAS works to develop markets, monitor agreements, and improve market access.
We take very seriously our partnership with the U.S. cotton industry, with whom we work to identify problems and meet challenges. For decades, the U.S. cotton industry has cultivated markets at home and abroad; who is not familiar with the cotton symbol? Last year, the industry spent $60 million on promotional efforts. The U.S. cotton industry has faced down the synthetics challenge in the domestic market: Cotton Incorporated [CI] has used checkoffs to help push cottons share of the U.S. fiber retail market over 60 percent. Other countries need to make similar efforts. These efforts should be led by those countries, both developed and developing, that rely on cotton fiber and textile exports for significant foreign exchange earnings.
USDA, through FAS, has utilized its programs to help our industry face the changing global market and economic conditions. Partly in response to the Asian financial crisis, we used $4.1 billion in export credit guarantees in fiscal 1999 to help sustain these economies and U.S. exports. Last years volume of GSM credit guarantees is expected to have exceeded 4,000 applications.
USDA recently allocated $590 million in GSM-102 funds for South Korea, $25 million of it for cotton. In fiscal 1999, $280 million went for cotton -- nearly 10 percent of all GSM-102 usage. Export credits have also helped boost Mexicos imports of U.S. cotton: Mexico's use exceeded $160 million in 1999, an increase of $125 million since fiscal 1994.
The Cotton Council International [CCI] has been allocated nearly $8 million under the Market Access Program for fiscal 1999, and another $135,000 under the Emerging Markets Program. Provided FAS is funded at its 1999 level this year, CCI will receive nearly $2 million under the Foreign Market Development Program to promote U.S. cotton fiber and value-added cotton exports.
In addition to our export programs, FAS is pursuing an ambitious trade agenda. On the legislative front, the Caribbean Basin Initiative [CBI] and the North American Free Trade Agreement [NAFTA] have helped to compensate somewhat for losses in Asia, especially China. Our NAFTA partners buy over 40 percent of all U.S. cotton exports. True, were seeing a steady increase in cotton product imports into the United States. But a growing proportion of our imports are from Mexico and the Caribbean, and are made of U.S. cotton.
The pending CBI parity legislation would put CBI nations on an equal footing with Canada and Mexico. Industry observers estimate it could boost U.S. exports by 1 million bales a year within 5 years. It would increase U.S. cotton fabric exports to the CBI, not just yarn.
With Step 2 funding re-authorized through the life of the Farm Bill, 2002, the domestic cotton program will be put on a dependable footing, with increased domestic use and exports of U.S. cotton.
Are these efforts paying off? In fiscal 1998, U.S. cotton exports set new records in 5 of our top 15 markets. Had our production -- and exportable supplies -- not been slashed by poor weather, wed have seen new records in several markets in 1999. Bangladesh is our second-largest market for U.S. Pima, and sales reached $70 million in 1998. Projections indicate U.S. cotton exports will rebound somewhat in fiscal 2000, to $1.7 billion.
Biotechnology and Bt Cotton
Now Id like to turn to one of the most important issues in global agriculture: biotechnology. It is with great disappointment that we witness recent events in Europe, including protests over the use of biotech cotton in apparel products. We believe strongly that sound science must be our guide to decisions about the products of biotechnology. And it is certainly appropriate for ICAC to endorse this message and to assist in an education program explaining the need for sound science in the decision-making process.
Benefits of Trade Agreements
Trade agreements have opened markets, reduced unfair competition, brought some discipline to sanitary-phytosanitary barriers, and introduced more effective dispute-settlement procedures in global trade. U.S. market opening efforts over the years have generally worked as intended to create export opportunities for U.S. farm products. But global trade reform is far from complete.
Recent liberalization measures may allow China to export more cotton, raising competition for export markets and driving down world prices. USDAs current projections assume that China will continue to be a net cotton exporter. But a more aggressive China sales policy would constrict other countries export prospects.
Currently, there is no effective restraint on Chinas agricultural policies. Through negotiations for its accession to the World Trade Organization [WTO], China agreed to end its monopoly on cotton imports through Chinatex and establish a tariff rate quota [TRQ] system. China agreed to a large TRQ for cotton: over 3 million bales, which will expand to nearly 4 million bales, with 67 percent of the trade reserved for the private sector. By way of comparison, Chinas1998 imports did not even reach 200,000 tons. China has agreed to end export subsidies once it joins the WTO, and will limit domestic support.
U.S. Goals for the WTO Negotiations
The value of integrating China into the rules-based international trade system is evident. And of course the upcoming round of WTO negotiations looms large on the U.S. trade agenda. Further world trade reform will broaden the export prospects to include major consuming countries that remain highly protected markets for raw and value-added cotton. The past 2 years demonstrate why we need freer, fairer trade: to maximize export opportunities, and to mitigate regional political and economic problems.
At the upcoming WTO negotiations, we will work to:
---mandate large new cuts in tariffs;
---eliminate export subsidies;
---significantly discipline state trading enterprises;
---tighten rules on domestic support policies; and
---clarify rules governing technical measures to ensure that sound science is the only legitimate basis for health and safety measures, such as those in the area of biotechnology.
In recent months, we have held 12 listening sessions around the United States to develop grass-roots support and gain input for the forthcoming WTO negotiations. We will continue to work closely with the U.S. agricultural industry to identify trade problems and develop strategies. In the negotiations, the United States will work to ensure a level playing field for all competitors.
GOVERNMENT MEASURES AFFECTING COTTON: REPORT ON U.S. PROGRAMS
Remarks by FAS Cotton, Oilseeds, Tobacco and Seeds Director J. Lawrence Blum, at Plenary Meeting of the International Cotton Advisory Plenary Meeting, Charleston, SC, on October 27, 1999.
The Secretariat of the International Cotton Advisory Committee has prepared a report on government measures affecting the cotton sector, which provides a useful review of the measures directed at the cotton sector of the U.S. agricultural community.
In addition to the Secretariats report, the U.S. Country Statement (made available to all ICAC delegates) provides further information on U.S. measures. Another member of this panel, American Cotton Shippers Association President Tommy Malone, will provide a cotton traders view of U.S. programs. Lastly, in-depth details of these and other farm program measures are readily available from the Department of Agriculture and most of this information is available on the internet.
What I will present today, therefore, will not be a detailed review but rather a brief discussion of these measures in terms of their impact, specifically, their impact on trade and their impact on production.
As noted in the working paper that was presented, the Agreement on Agriculture of the World Trade Organization calls for the continuation of reform to substantially reduce government aid and protection provided to the agriculture sector.
The United States is committed to improved access to markets through reduced tariffs, expanded quotas, reduced domestic aid, the elimination of export subsidies, and disciplines on state trading enterprises. We are committed to the concept of de-linking support from production in order to not distort international trade. Instead, we are moving toward an income-support system.
First, I will briefly comment upon two of the measures noted in the Secretariats report - the Loan Deficiency Payment and the Production Flexibility Contract Payment. The Contract Payment, also known as the Agricultural Market Transition Act Payment, is non-commodity specific. Producers are free to grow whatever crops they choose. Producers receive fixed but declining payments for a seven-year period ending in the year 2002.
The key point is that these payments are decoupled from production. These payments are notified to the WTO as a "green box" item.
The Loan Deficiency Payment Program is commodity specific and is notified to the WTO as an "amber box" item. This item is included in the "Aggregate Measurement of Support."
The program that received considerable attention at the last Plenary meeting is the 3-part cotton Step program. Step 1 deals with technical adjustments to the price mechanism. Step 2 provides payments to both traders and mills when U.S. prices diverge from world cotton prices according to a set formula. Step 2 payments were made until mid-December of last year, and on Friday, October 22, the president signed legislation re-authorizing this program.
Step 3 allows for increased imports of cotton making the U.S. market available to foreign suppliers of raw cotton over and above WTO quotas. The United States imported about 450,000 bales of foreign cotton under Step 3 in 1998/99.
Assuming there are no significant changes in the administration of the Step 2 program, at current rates, Step 2 spending to domestic mills will be about $325 million for the 1999/2000 season and about $175 million for exporters. As these figures indicate, it is important to note that the main use of Step 2 is to ensure that U.S. mills can buy U.S. cotton at the same price that foreign mills can buy foreign cotton.
The United States is the worlds largest retail market for cotton textiles. Due to the success of the industrys research and promotion program, the United States is also the only major world market where cottons share of retail fiber use has seen a significant rise. However, much of the benefit of higher U.S. retail cotton use is reaped by foreign mills spinning foreign cotton; cotton textile imports rose 13 percent during the 1998/99 marketing year, while U.S. mill use fell 8 percent.
Regarding Step 2 payments, there are two concerns about their impact on prices and their potential for trade distortion. The impact of Step 2 on world prices is dwarfed by other global macroeconomic events. Step 2 export spending has averaged about one-quarter of one percent of the value of world cotton consumption since the programs inception; it is thus a minor factor in the global cotton economy.
Broader forces, beyond agricultural policy as well as beyond any individual commodity policy, are behind the low prices of recent years. During the 1990s, the economic collapse of the Soviet Union, the weakness of Japans "Post-bubble" economy, and the Asian financial crisis have created an extraordinary weak foundation for prices of primary commodities.
As a consequence, all commodities have suffered from depressed prices in recent years, and it is far beyond the ability of policy changes affecting individual commodities to overcome these global price depressing events.
The most important factor contributing to the current weakness in world cotton prices is Chinas reorientation from a net importer to a net exporter. This major fluctuation in Chinas net trade position - resulting from efforts to dispose of vast surplus stocks procured at levels well above world prices, dwarfs any marginal impact of Step 2 on world prices.
An argument can be made that Step 2 has actually strengthened the N.Y. futures market, and the worlds producers such as Australian farmers who sell through the N.Y. futures market have actually realized a greater return.
Turning to trade and the impact of Step 2, our analysis indicates that Step 2 has had a minimal impact. USDA estimates that Step 2 increases U.S. cotton exports by several hundred thousand bales per year; 1999/2000 exports were forecast in October at 5.5 million bales without Step 2 funding; with Step 2 funding now in effect, U.S. exports could be boosted by at most 5 percent. This represents an additional 1 percent of world exports. The impact of Step 2 funds on U.S. exports is minimal when examined in a global context (Note: USDA increased its export estimate by 200,000 bales, or 3.6 percent in November. While the reauthorization of Step 2 funding was a primary factor, an increase in the estimate of Mexicos imports by 100,000 bales, where the U.S. market share exceeds 90 percent, and other factors, were also considered).
Are there markets where the United States has increased its market share at the expense of other leading exporters? U.S. market share in Indonesia, the worlds largest cotton importer, dropped steadily from 45 percent in 1994/95 to 10 percent in 1998/99, while Australias market share increased over this same period from 16 percent to 43 percent. U.S. market share in Southeast Asia shows a similar trend.
The greatest use of Step 2 funding has been to strengthen U.S. exports to Mexico, where the U.S. has enjoyed an average market share of 95 percent from 1994/95 through 1998/99. Other major exporters do not enjoy the competitive advantage that the U.S. has for the Mexican market, which is due in part to geographic location.
Additionally, NAFTA trade provisions have fostered Mexican textile exports, made from U.S. cotton, yarn and fabric, to the United States. Mexico is now the primary source of cotton textile imports to the United States.
In conclusion, I will comment on the emergency relief packages provided to farmers last year and this year. Details about this years package are not yet available but are expected to be similar to the package provided last year. Therefore, the following comments are about last years program.
In 1998, the President and Congress approved an emergency relief package for farmers and ranchers, who suffered heavy losses due to natural disasters and weak export markets. There have been questions about whether or not this action is backtracking from the decoupled income support mechanisms embodied in the 1996 farm legislation and our WTO commitments. It is important to note that this was an emergency package, and is temporary in nature. These payments were targeted at assisting farmers and ranchers who have been hit hardest by crop and animal losses due to natural disasters and other global economic events.
This emergency package was fully consistent with our WTO obligations, as the level of support we provided to farmers in 1998 was well below our allowed limit. Most of this support will be channeled through natural disaster payments and income support measures.