U.S. cotton producers — and, indeed, cotton farmers everywhere — would like to see cotton futures move out of the 40-cent range where they seem to have been stuck for most of the last 10 months.
That may not happen right away, but USDA economists speaking at the Department's annual Agricultural Outlook Forum in Arlington, Va., offered hope for some price improvement in the months ahead.
Besides predicting that world cotton production could drop by 14 million bales to 103 million bales for the crop that will be planted in 2005, the economists said world cotton consumption could rise 3 percent from 2004/2005's record 105.8 million to 109 million bales.
“World cotton consumption made one of its most decisive upward moves ever in 2004/2005, reaching an estimated 105.8 million bales and capping a six-year run that has seen world cotton consumption grow by 25 percent,” said James Johnson, an agricultural economist with USDA's Foreign Agricultural Service.
“This increase is all the more startling for having followed a decade that saw cotton consumption essentially unchanged between 1988 and 1999. During the last decade, cotton consumption has grown 2.1 percent annually compared with a 1.7 percent average rate over the last 40 years.”
Johnson says USDA is forecasting that world cotton consumption grew 7.5 percent in 2004/2005.
“Strong world economic growth is boosting consumer demand, especially in the developing Asian economies, at the same time that large global supplies are depressing cotton prices — cotton prices are lower both in absolute terms and relative to polyester.”
A large portion of that increase is due to the acceleration of growth in cotton spinning in China, which now accounts for 35 percent of world cotton consumption or 37.5 million bales in 2004/2005. China's mill use has risen 75 percent during the last five years.
“China's 2005/2006 cotton consumption will continue to expand faster than world average growth rates as the elimination of trade barriers provides improved access to foreign textile markets, and rising incomes support growth in demand by Chinese consumers,” Johnson says. “Consumption is forecast at 41 million bales, a 9 percent increase from the estimated 2004/2005 level.”
Although cotton producers would like to see another 7.5 increase in world cotton consumption in 2005/2006, Johnson says it probably won't be that simple because of a number of as yet unforeseeable events.
For openers, world GDP growth in 2005 and 2006 is expected to slow compared with 2004, but remain above average. World growth in 2004 was the strongest since the 1970s, rising 5 percent, according to the International Monetary Fund. It could slow to 4.3 percent, but that would be stronger than the rate for 2001/2003.
Real GDP growth in the United States is expected to reach 3.5 percent in 2005 and 3.1 percent in 2006 while that of the European Union is forecast at 1.9 and 2.1 percent and in Japan, 1.5 and 2.0 percent. China's staggering GDP growth could continue at rates of 8.2 and 7.6 percent while India's could reach 6.3 and 6 percent.
Johnson notes that cotton prices dropped 26 percent in real terms last year, and economists typically have observed a relationship between cotton prices and consumption after a one-year lag.
“Consumption in 2004/2005 behaved counter to the intuition, rising despite a 22-percent price inflation-adjusted increase during the year before,” he said. “This does not necessarily rule out a lag between cotton price and consumption changes, but it does suggest caution in assuming 2005/2006's consumption will receive a significant boost from this year's decline in prices.”
Looking at previous significant gains in mill use suggests a pattern, Johnson says. Since 1970, only five other years have seen an expansion in global cotton consumption on a par with 2004's.
“In three of those years, the preceding year's consumption shrank; thus, it seems reasonable to assume that inventory demand was responding significantly to changes in income growth, and the significant increase was partly a function of the previous year's decline.”
On average, he said, in the years just before these high growth years, world consumption fell on average by 0.3 percent. In the year after the high growth years, consumption typically grew at a below average rate, except for the mid-1980s when two high growth years followed consecutively.
Global income patterns will be relatively favorable for cotton consumption in 2005/2006, says Johnson, although not quite as favorable as in 2004/2005. And lower prices should also help boost consumption.
“The outlook for cotton's share of household fiber consumption is positive in North America and Europe, since the end of the Multi-Fiber Arrangement quotas should reduce prices and increase consumption,” he notes.
For producers and merchants, China's continued growth is projected to boost imports in that country and the world significantly.
“China's consumption is forecast to exceed production by 14 million bales and, with limited stocks to draw upon, the shortfall will have to be supplied by imports, currently forecast at 14.5 million bales or an increase of 60 percent from the 2004/2005 estimate.
“Similarly, world trade is also expected to rise to a record 38 million bales,” he added. “Strong imports will provide opportunities for many of the world's cotton exporters, including the United States, to reduce surplus stocks accumulated in 2004/2005.”
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