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How losing Step 2 would affect exports

There is little correlation between weekly shipments of U.S. raw cotton and the weekly Step 2 payment, according to an analysis of historical data by International Cotton Advisory Committee economist Andrei Guitchounts.

However, there is a good relationship between U.S. exports and U.S. cotton supply, according to Guitchounts, who presented the data in late September at the 64th plenary meeting of the ICAC, in Liverpool, England.

There were some sporadic exceptions to the economist’s findings, the result of studying data dating back to 1996-97, when payments became effective on the date of shipment. He noted that extreme spikes in Step 2 payments would cause spikes in shipments in anticipation of steep declines in payments during forthcoming weeks. However, averaged over several months, payments and shipments show no correlation.

For example, during January-May 2004, average Step 2 payments were 1.5 cents per pound and average weekly shipments of U.S. cotton were 587,000 bales. During June-July 2004, average Step 2 payments were 8.2 cents per pound, while average weekly shipments were only 269,000 bales.

Analyses of the historical data indicate the lack of any consistent effect of higher payment rates on U.S. shipments. Annual total payments to U.S. exporters also demonstrate little correlation with the size of U.S. exports.

On the other hand, a comparison of the size of the cotton supply in the United States with exports indicates that there is a very good correlation between the two, and U.S. exports are a function of the U.S. exportable supply. U.S. exportable cotton supply averaged 4 million tons during 2001-02 to 2004-05, allowing record exports during all of the four seasons.

Increased import demand from major textile economies with a shortage of cotton from domestic production is another factor which contributed to record U.S. exports, according to Guitchounts.

“The U.S. cotton supply is affected by other production and support programs, allowing producers to continue producing cotton during periods of low market prices, sell it competitively in international markets without sacrificing incomes.

“The conclusion of this analysis is that the elimination of the U.S. Step 2 program will have very little effect on U.S. exports, and as a consequence on market prices. It could affect profits received by major U.S. merchants and textile mills.

A WTO body ruled in March 2005 that the U.S. must change the Step 2 program by June 30, 2005. The U. S. government announced that it will comply with the WTO ruling and proposed legislative changes to the U.S. Congress that could eliminate the Step 2 program.

World trade

According to Guitchounts, world cotton trade is projected to surpass a record 8.1 million tons in 2005-06 boosted by projected record imports by China, lower world production and increased consumption in major textile economies in the rest of the world.

The growth is due to increasing cotton mill use in cotton producing countries, with domestic production falling behind increasing consumption in China, Pakistan, India and Turkey.

The four countries accounted for 15 percent of world imports in 2000-01 and for an estimated 36 percent in 2004-05, while imports by the rest of the world declined by 560,000 tons. In 2005-06, the share of the four countries is projected to reach 49 percent of world cotton imports, while imports by the rest of the world are projected to decline by 400,000 tons.

As a result of increased dependency of the four producing countries on trade, world imports as a share of world mill use are projected to rise from 30 percent in 2004-05 to 34 percent in 2005-06.

For the past six years, China has been the driving force behind the world textile industry and world textile trade. Between 1998-99 and 2004-05, additional mill consumption of cotton in China accounted for 79 percent of additional consumption worldwide.

Guitchounts noted that cotton mill use in China is driven by the rapid growth of the textile industry, stimulated by the expansion of textile and apparel exports, domestic end-use due to rising disposable incomes and lower cotton prices.

There is little doubt that substantial impacts on world textile trade were the result of China’s entry into the World Trade Organization in late 2001 and elimination of textile quotas in 2005.

In 2004 exports of textiles and apparel by China grew by 21 percent and reached $97.4 billion. Cotton products represented 32 percent of all textile and apparel exports by China.

A sharp increase of cotton use in China from 4.3 million tons in 1998-99 to an estimated 8.2 million tons in 2004-05 led to a record surge of cotton imports and caused world trade to increase to a record. Because of the increasing supply-demand gap, imports by China are projected to more than double and reach 2.85 million tons in 2005-06.

Cotton mill use in China is projected to reach 8.6 million tons in 2005-06, or 36 percent of world mill use.

Because of a record world crop in 2004-05, world cotton supplies are more than adequate to meet increasing import demand during 2005-06 despite a projected decline in world production of 1.3 million tons. The largest share of increased world import demand was met the last four years by exports from the United States, where the largest exportable supplies were located.

U.S. exports reached 3.1 million tons in 2004-05, or 40 percent of world exports, compared with 1.5 million tons, or 25 percent of world exports in 2000-01.

In 2005-06, U.S. exports are projected above 3.1 million tons as the exportable supply continues to increase.

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