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Huge crop, synthetics dampen market

In the overall U.S. fiber market today, cotton's share “continues to be the success story,” says Gary Adams, with cotton actually increasing share in relation to man-made fiber.

But, the National Cotton Council vice president of economic policy analysis notes, the United States accounts for only 5 percent of the world's population and 20 percent to 25 percent of retail cotton product consumption. “An area of concern remains the other 95 percent of the world's consumers” who are confronted with an array of cheaper man-made fibers.

“This continues to be the biggest challenge as we look at issues facing the global cotton market,” he said at the annual conference of the Cotton Board, which has oversight for the producer/importer-supported research and promotion programs of Cotton Incorporated.

“In the U.S. retail market, based on data through June of this year, he says, it appears the United States will have slightly lower retail sales of cotton products than in 2003.

“The trend of the past several years, with imports continuing to increase, will probably result in a domestic dirt-to-shirt use of 1 million to 2 million bales, with the remainder being supplied by imported products (though there is a good bit of U.S. cotton coming back into the country in those imports).”

North American Free Trade Agreement (NAFTA) and Caribbean Basin Initiative (CBI) countries have historically been the major suppliers of these textile products, Adams notes. “Going back to 1999, they provided 35 percent of imports into the United States; China provided only 7 percent, and Pakistan 10 percent.

“With China's entry into the World Trade Organization, we've seen NAFTA and CBI countries lose share, while China and Pakistan have increased their shares. In the post-quota environment beginning Jan. 1, 2005, these trends are expected to accelerate and China likely will continue to increase its share of the U.S. market at the expense of NAFTA/CBI countries.”

With this shift in imported products market share has come a decline in U.S. mill use. For the 2003 crop, Adams says, U.S. mill use was at 6.5 million bales, down from the peak of 11.3 million 1997. For 2004, that's forecast to drop to about 6.1 million.

The latter half of the 2004 marketing year, which will coincide with the first half of 2005 and the elimination of textile quotas, “is likely to bring increased pressure, and it wouldn't surprise me to see mill use dip below 6 million bales for the '04 year.”

While mill use is declining in the United States and the European Union, China's mill use is expected to hit 34 million to 35 million bales in 2004 as it continues to expand its role in the world market.

“This shifting of mill use from the United States to China and other countries is encouraging the amount of trade in raw cotton fiber, which has moved up the last couple of years to 31 million to 33 million bales,” Adams says. “With the rebound in the 2004 crop, it's likely we'll see a smaller trade number than 2003, but still fairly large by historical standards.”

The United States is the largest supplier of cotton to the export market; in 2003, it amounted to almost 14 million bales. But with the larger U.S. and world crops in 2004, U.S. shipments could fall to around 12 million bales.

Much of the increased production from central Asia and West Africa will enter the export market as raw fiber, Adams says, “and we'll see their role in the world market increase.”

China remains the 800-pound gorilla, with “the ability to swing world trade when they step in and buy between 6 million and 8 million bales,” Adams says.

In 2004, their crop should be between 28 million to 30 million bales, with consumption projected at 34 million to 35 million.

“China will still be a substantial importer this year — though perhaps not as large as in 2003. But I don't think they're in a position where their domestic production can keep pace with their consumption, and it's likely they'll continue to come to the world market to purchase cotton.”

China's imports of cotton, going back to 1994, have been “a fairly good mirror image” of the United States' ability to export on the world market and what China purchases on the world market, Adams notes.

“With our need to export 65 percent to 70 percent of the U.S. crop, a lot hinges on whether China is consistently going to come to the world market for an average 4 million to 6 million bales year-in and year-out.”

Most economists are “relatively optimistic” about the macroeconomic situation for 2004 on an international basis, Adams says.

“We're still expecting some fairly good growth in 2004 and on into 2005. China is likely to still lead the way, with growth of 8 percent to 9 percent.” A cautionary flag for their performance this year is reflected in some tightening in their lending and banking sector that could slow their industrial output somewhat.

“Cotton's economic outlook is directly linked to what happens in China,” Adams says.

In the United States, “in general, there's still a fairly optimistic outlook for the economy. A major concern continues to be oil prices, which have been at record levels; the extent to which we see oil prices slow the economy remains to be seen.”

USDA's numbers are indicating just over 107 million bales for the 2004 world crop, about 13 million more than last year, Adams notes, and 8 million to 9 million bales above 2001.

“So, a significant recovery is being projected for this year's crop.”

What's driving big increases in world production?

“A big part of it is increased acreage outside the United States, up about 8 percent or so. China appears to be leading the way, with a 12 to 15 percent increase, and in most other production regions we've seen increases in acreage. In terms of recent historical levels, this would be a high for acreage outside the United States.”

Yield estimates for the foreign crop are high, with an average of about 560 pounds per acre. USDA did back off a bit on its estimate of China's crop, down to 29.5 million bales from the earlier estimate of 30 million, but, Adams says, it would still be a record crop.

U.S. acreage is up 2 percent overall (including a 43 percent increase for extra long staple cotton) and the expectation of a record 760 pounds per acre yield across the Cotton Belt points to a crop of almost 21 million bales for the United States.

On the demand side, mill use on a global basis “is probably going to be somewhere around 100 million and 101 million bales,” Adams says.

This will be met with continued strong competition from man-made fibers. “With the increase, we've seen in polyester surpassed cotton in 2003, a gap that's likely to widen in 2004. This has contributed to what has been a reasonably slow growth in overall cotton use in recent years.”

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