Beltwide '06: The Coming World Market

How will the world cotton market shape up in the new year?

Gary Adams, the National Cotton Council’s vice president for economics and policy analysis, brought the following observations to this week’s Beltwide Cotton Conference in San Antonio:

• Bigger crops have pushed more bales onto the market. “From 1995 through 2003, world cotton production and consumption ranged between 85 and 100 million bales, and we generally traded between 25 and 30 million bales. In the last two years, it appears that we’ve moved to a new level. The record-crop of 120 million bales in 2004 is being followed by another large crop between 110 and 115 million bales.”

• Consumption has also jumped. It’s estimated at 115 million bales for the current marketing year, said Adams. The amount of cotton traded increased, with a large share of that going to China.

Data for 2004 and 2005 raises several questions about the future, Adams said during the conference’s opening session.

• Is this “bigger” market a new plateau or a spike?

• Can the United States continue to find a home for 15 million bales in the export market?

• If so, who will be the customers?

Adams cited several countries and regions and the roles they might play.

Mexico: It’s currently our second or third largest export customer, buying about 1.8 million bales of U.S. cotton per year. “It is also the case that much of the cotton they purchase is eventually returned to the U.S. retail market as apparel or textiles,” said Adams. “The concern for Mexico’s textile industry is much the same as the U.S. – that is competition from Asian textile products. Mexico continues to lose share of the U.S retail market to China, and as a result, their mill use has been flat to slightly declining. The recent textile import agreement between the U.S. and China may slow further declines between now and 2008, but expect this market to remain under pressure longer term.”

Brazil: This South American country has tremendous potential to expand its production. “Some estimates suggest that Brazil could bring 250 million acres of new land into crop production – that’s roughly equivalent to what the United States has in production of the major row crops. Also, the new areas coming into cotton production are high-yielding.” Ag expansion is a priority for Brazil’s government, Adams said, citing a USDA estimate that the Brazilian government is providing $13 billion in support to agriculture through credit and investment programs.

Brazil’s cost of production have been among the lowest, but a stronger currency has increased the cost of imported inputs and reduced the country’s competitiveness. “Current expectations call for a drop in both production and exports in the short term,” said Adams. “However, longer term, Brazil still must be viewed as a country with the potential to increase production and exports, assuming they address some long-standing transportation issues.”

West Africa: The cotton-producing countries in West Africa, mostly former French colonies, have gained increased attention, primarily due to their role in bringing cotton front and center at the World Trade Organization (WTO). “Together, these countries account for only 4 percent of world cotton production. With little in the way of a textile industry, roughly 90 percent of their crop is exported as raw fiber, so they are a more significant player in the overall trade picture.” The actual potential for growth in these production areas, though, depends on whether they can improve their own production, ginning and distribution systems, Adams noted.

“During the past decade, average yields in West Africa have remained flat, while the average across all other countries has increased by 150 pounds per acre,” he specified.

Western Europe: Although the European Union’s agricultural policy offers the highest per-pound support of all cotton-producing countries, they account for only 2 percent of world production, Adams pointed out. “Also, much like our own textile industry, their industry has suffered from an influx of imported textile products. As a result, mill use in Western Europe has fallen from 6 down to 3 million bales.”

But Western Europe still represents a potential growth area for cotton. Per-capita purchases of cotton apparel and textile products in Western Europe lag that of U.S. consumers by 22 pounds. With a population of almost 400 million, each additional pound of cotton consumption equates to another 800,000 bales of demand, Adams estimated.

India: India is poised for growth, both in cotton demand and cotton production. It’s the world’s second fastest growing economy after China and could overtake China in population over the coming decades. “With more than 16 million bales of mill use, they are the second largest spinner, and generally considered to be well-positioned to prosper in the post-textile quota environment.

“With almost 22 million acres harvested, India devotes more area to cotton production than any other country. However, their production potential depends on their ability to improve yields. Prior to 2003, yields averaged below 300 pounds per acre – less than half the level of other countries. Since then, we’ve seen a 100-pound improvement in yields.” Gains were mostly attributable to adoption of new technology, like Bt varieties.

China: China is the world’s largest producer, with about 25 million bales in 2005 and 29 million in 2004. China also is the world’s largest spinner at 43 million bales and also now is the largest importer, with potential purchases of 16 million bales in the current marketing year.

With purchases of 5 million bales in the first 5 months of this marketing year, China is on pace to be the largest consumer of U.S. cotton, said Adams. It is likely that the U.S. will sell China 7 to 8 million bales of the 2005 crop.

“However, there are still issues with access to China’s market,” Adams said. “A continuing concern is their allocation of a portion of their quota based on the condition of export of the textile product. In addition, China imposes a variable levy on all imports above the initial quota of 4 million bales, in effect raising the cotton price relative to manmade fibers.”

Even though China is home to 1.3 billion people, it has shown little growth in its own retail market for cotton products. “The growth in mill demand is clearly driven by their ability to sell textile products in other markets. This remains a concern of not only the U.S. textile industry, but also textile industries in most developing countries.”

On a per-capita basis, China’s own retail consumption of 18 million bales per year only amounts to 6 pounds per person. Meanwhile, manmade fiber consumption stands at 14 pounds per person, having tripled over the past decade. “If cotton had simply maintained its market share relative to manmade fibers, it would mean an additional 12 million bales of consumption in China’s retail channels, Adams pointed out.