U.S. cotton faces a challenging economic outlook due to lower prices induced by record world production, continued reliance on exports and post-quota pressures on the domestic textile industry, a National Cotton Council economist told delegates at the organization's annual meeting in Washington, D.C.
In presenting the NCC's 2005 Economic Outlook to delegates, Gary Adams, the NCC's vice president, Economics and Policy Analysis, said growers have witnessed extreme price movements in both cotton and competing crops over the past 18 months. Prices moved sharply higher in the fall of 2003 only to fall some 20 cents per pound in 2004 as favorable weather produced a world cotton crop estimated at just more than 115 million bales.
As for U.S. cotton, lower abandonment and record yields led to a 23 million bale crop in 2004.
Adams said, “Despite a series of hurricanes in the Southeast and heavy late-season rains in Texas and California, the 2004 national average yield is estimated at an astounding 846 pounds per acre, 116 pounds higher than the previous record set in 2003. This larger crop will more than offset smaller beginning stocks, giving larger cotton supplies for the 2004 marketing year than any time in history.”
For 2005, the acreage survey conducted by NCC economists estimates U.S. cotton acreage at 13.73 million acres, only 0.6 percent higher than the 2004 level. The slightly higher U.S. number was primarily due to increased plantings in the Mid-South offsetting declines in other regions. Assuming normal abandonment and yields, projected production is 18.86 million bales. Adding in beginning stocks and imports, total supplies for the 2005 crop year would be 26.60 million bales.
In addition to uncertainties in the marketplace, Adams spoke of a number of policy challenges confronting the cotton industry. The contraction of the U.S. textile industry continued in 2004, but at a slower rate than in past years. Domestic mill use for the 2004 crop year is estimated at 6.20 million bales, 290,000 bales below the 2003 level.
On Jan. 1, 2005, fiber markets entered a new environment with the elimination of all remaining quotas on textile and apparel trade. For the U.S. textile industry, the removal of quotas increases the competition from imported cotton textiles, and also will lead to further downward pressure on retail prices. As a result, further declines are expected for the domestic textile industry. NCC economists expect U.S. mill use to fall to 5.81 million bales for the 2005/06 marketing year. Latest data from USDA indicate that approximately 60 percent of the world's cotton is spun in China, India and Pakistan, and the percentage should increase in the post-quota environment.
As domestic mill use declines, exports will continue to be relied upon as the primary outlet for the U.S. crop. Exports for the current marketing year are expected to total 12.70 million bales, down about 1 million bales from 2003. The 2005 export projection of 13.38 million bales, if realized, would be the second largest on record, falling just short of the 2003/04 level of 13.76 million bales.
“Success depends on competitiveness and access,” Adams said. “Competitiveness entails both price and quality. The U.S. industry must produce fiber at competitive prices that has the characteristics demanded by international buyers.”
Projected mill use and exports are expected to slightly exceed the size of the U.S. crop, leading to a 300,000 bale decline in U.S. stocks. Despite the decline, ending stocks on July 31, 2006 are still projected at 7.40 million bales, giving a stocks-to-use ratio of 39 percent. Barring significant weather developments in the 2005 growing season, stock levels would suggest continued pressure on prices.
The world situation, as estimated by USDA for 2004/05, is driven by a record crop of 115.64 million bales. USDA puts 2004/05 world mill use at 104.43 million bales. For 2005/06, mill use is projected to reach 106.44 million bales, about 2 million bales above 2004/05. The growth comes in response to increased purchasing power driven by a stronger world economy. In addition, weaker cotton prices, at the same time that manmade fiber prices have increased, are encouraging more consumption.
“It is now the case,” Adams said, “that we have a demand base that will quickly draw down stocks should the crop fall below 100 million bales.”
For 2005, reduced plantings - induced by weaker cotton prices and a return to average yields — lowers world production to 104.63 million bales, a drop of 11 million from 2004. The current estimates for production and consumption would lead to a decline of global stocks by July 31, 2006. The global stocks/use ratio is projected at 42.5 percent, down from 45.1 percent for the 2004 marketing year.