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Exports and China continue dominant influences on cotton

With 75 percent of the American cotton crop moving into the export market, the industry is going to need to step up efforts to increase retail demand for cotton products outside the U.S., particularly in China, says Gary Adams.

“The real question is how to sustain the upward trend in demand, particularly if cotton prices move higher, and given the ongoing competition from polyester,” the National Cotton Council vice president/chief economist told the annual summer conference of the Southern Cotton Ginners Association at Baton Rouge.

“We want to continue to try and move world mill use along and avoid a shift to polyester as cotton prices move higher. However, higher oil prices, $75 per barrel or more, would also push up prices for man-made fibers.”

With more than half of U.S. cotton exports going to China, Adams says the industry “needs to be sure we do what we can to understand that market, understand their textile mills, learn what they want out of our cotton, and be sure we get it there in a timely, competitive fashion.”

To that end, an industry group recently visited China to meet with textile mill executives and government leaders.

The large volume of cotton going to China “places a lot of constraints on our infrastructure and distribution system,” he says, “and that's getting a lot of attention throughout the industry.”

Further pressure is likely on the U.S. textile industry, which has suffered numerous plant closings and the loss of thousands of jobs in recent years.

“One of the recommendations in the House version of the new farm bill is a payment of 4 cents per pound on all bales used,” Adams says. “If this makes it into the final farm bill, it can help provide stability for our textile industry, give them some support for making investments in improving facilities and infrastructure, and help to increase their competitiveness.”

In an export-oriented market like the U.S. is in, the gap between foreign use and foreign production is defining the market for this country's exports and the size of that market, he says.

“Applying some linear trends for the last decade or so and rolling them out in front of us, use outside the U.S. is expanding at a faster rate than production. Baste on the trends, if we look a few years out, we continue to see a market for U.S. cotton that's largely international, and that's the market we're going to be targeting.”

Looking at the USDA's 2007 world production and use numbers, Adams says, “We're looking at about a 12-million bale gap between world consumption and world production. So, we're going to need to pull in stocks to meet that shortfall.”

But he says, “a lot of uncertainty surrounds the global numbers,” particularly those from China, which is the world's leading cotton producer. “I think it's becoming more evident we're underestimating their mill use and their production. The real question is, what's China buying in the world market?”

The “wild card” in the world cotton production picture, Adams says, is India, which plants more cotton than any other country, but ranks second behind China in yield.

“We've seen dramatic increases in their yields in recent years, and they've still got room to grow.”

Australia has had major water concerns and isn't likely to see any longer-term expansion and “Brazil is always a possibility for cotton expansion, but they have to weigh it against soybeans.”

The reductions in U.S. cotton acreage this year are a result of the flexibility in the 2002 farm program, Adams says, which gave them the option to shift acres out of cotton when they saw significant upward movement in corn and soybean prices.

“The attractiveness of competing crops increased to levels we hadn't seen in the past decade.”

Since mid-May, prices have rallied “and the market seems more nervous now that they've seen acreage numbers and how things are shaking out with the cotton balance sheet.

“With Dec. '08 trading at about 70 cents and other contracts trading higher, the biggest challenge for cotton as we look to 2008 may be the competition from double-cropping wheat with soybeans.”

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