China's insatiable appetite for U.S. raw cotton begs a question: Are U.S. cotton producers in a brave new market, or out on a big limb?
It's a question that could be answered in the cotton fields of China itself, and the answer depends on whether or not China can, over time, ramp up its cotton production enough to satisfy the needs of its domestic textile mills and not have to import as much raw cotton.
In the short term, the Chinese situation continues to draw U.S. cotton trade further up a tree and out onto a shaky branch. There are two reasons for this short-term enthusiasm.
One, there are reports that China's 2005 cotton crop has been damaged by bad weather and may be well under USDA's September estimate of 25.5 million bales. Two, on the demand side, China has been a good customer for U.S. cotton. Just check weekly August and September export sales reports.
For now, Chinese mills can import cotton more cheaply than what they can purchase it for in their own country, which is good for the United States. Whether or not this continues could depend on how much cotton the world, and China, is consistently able to produce.
Recently, the production trend line is steeply higher thanks to advancements in cotton genetics and new technologies in breeding. The United States can place much of its success on its boll weevil eradication program and Bt cotton. India's government approved Bt cotton in 2002. This year, India is on the verge of a bumper crop, probably 20 million bales, of which 2 million could go into the export market.
In China, breeders claim they have developed a hybrid cotton that has been tested commercially with yields 25 percent better than current varieties. China has already increased its average per acre yield considerably since 1980.
According to Texas A&M economist Carl Anderson, “If China continues to increase its cotton yields, it will start satisfying more and more of its own raw fiber needs. That would slam the door right in our face, because we have to move a lot of cotton to China.”
How cotton-producing countries trade their surpluses is a situation “that needs to be looked at as to whether trade rules and regulations are being followed by our foreign competitors, as well as ourselves,” he noted.
But something can be learned from China, according to Anderson. “China's refusal to join the International Cotton Advisory Committee tells me that they aren't going to join anything unless there is a big advantage for China. We need to make sure we have the mindset to take care of ourselves where necessary.”
U.S. cotton producers have their work cut out for them. Terry Townsend, executive director of the ICAC, commented recently that much of the world's cotton can be produced for about 44 cents per pound.
According to Townsend, that would portend an A-Index of somewhere between 50 cents and 60 cents. Anderson noted, “If you take 15 cents off that to roughly get our adjusted world price, we're way below the loan rate and way below our cost to produce.
“We need to get the attention from all U.S. cotton industry leaders to put our heads together and see how we can best maintain a viable cotton industry, after having lost about half of our textile mills,” Anderson said. “We are on track to export far more cotton than we use in the United States, at least twice as much. This puts our future in the hands of foreign countries.”
It makes you wonder. Is that giant buzzing sound the hum of Chinese textile mills spinning U.S. cotton. Or did somebody just crank up a chain saw?