Cotton Industry Forecasts: US & Global Markets - 2009
The U.S. upland cotton sector enters the 21st century facing supply and demand challenges that are related to both the domestic and international marketplace. Outside the United States, cotton consumption recently has expanded faster than production and has led to increased trade in raw cotton. Global textile and apparel trade has also expanded, due largely to trade liberalization measures and the continued strength of U.S. consumer demand for cotton products.
During the 1990s, the domestic textile and apparel industry was the dominant customer of U.S. cotton producers, accounting for approximately 60 percent of the total demand for U.S. cotton. More recently, however, this share has fallen as import competition from less expensive foreign cotton textile and apparel products has displaced considerable demand for U.S.-produced products. On the other hand, foreign demand for U.S. raw cotton has risen, resulting in a larger share of U.S. cotton moving overseas. Consequently, the U.S. cotton industry now faces increased global competition; and the effects of these changes on the U.S. cotton sector have been evaluated and are reviewed here.
Each year, USDA updates its 10-year projections of supply and utilization for major field crops grown in the United States, including cotton. The commodity projections are used to forecast farm program costs and to prepare President Obama’s budget. One key use of the projections is as a “baseline” from which to analyze the impacts of potential policy changes affecting U.S. agriculture.
Upland US cotton planted area is projected to decline slightly throughout the projection period, yield offset the lower area, leading to relatively flat production. Meanwhile, most of the US crop will be destined for overseas markets and global competition.
Exports became the dominant market for US upland cotton several years ago as the domestic textile industry faced intense price competition from imported products. That competition continues and is largely related to lower labor costs. The export-dominated market for cotton is expected to remain throughout the projection period as further reductions are foreseen for the domestic textile industry. As a result of increased foreign competition, US cotton demand as a share of global consumption is likely to decline slightly over time.
The U.S. cotton industry continues to face many of the supply and demand concerns confronting other field crops. However, since cotton is used primarily in manufactured products, the industry faces additional challenges associated with the economic well-being of downstream manufacturing industries.
Cotton SupplySeveral factors underlie the long-term trends that will determine US upland cotton supplies during marketing years 2009-2013.
US Upland Cotton Plantings on a Slight Upward Trend. Upland cotton planted area in the United States has been on a slowly rising trend since the late 1960s, reversing the previous trend in cotton acreage. However, the areas where upland cotton plantings occurred have fluctuated considerably during this period. During the mid-1970s, cotton area moved westward as Southeast production costs rose significantly due largely to the crop-damaging effects of the boll weevil. By the 1990s, though, water concerns in the West and the successful boll weevil eradication program in the Southeast saw cotton returning eastward. Over the past several years, upland cotton area has been about equally divided between the eastern half (Southeast and Delta regions) and the western half (Southwest and West regions) of the Cotton Belt. Farm Acts has facilitated some fluctuation in upland cotton area as producers.
Under limited planting flexibility in marketing year 1995/96 (August-July), upland cotton area reached a modern high of 16.7 million acres as producers responded to high cotton prices. Since then, however, prices have moderated and net return expectations for cotton and competing crops continue to drive acreage decisions. Between 1996/97 and 2003/04, upland cotton area has ranged between 13.1 and 15.5 million acres, averaging approximately 14.2 million acres over this period.
Production has Stronger Upward Trend. Upland cotton production, like area, has seen an upward movement over the past 20 years but the trend has been more pronounced. U.S. production gains during the previous two decades have paralleled advances in technology (seed varieties, fertilizers, pesticides, and machinery) and in production practices (reduced tillage, irrigation, crop rotations, and pest management systems). Results from these advances can be illustrated in the record upland crop of 19.6 million bales in 2001/02 that surpassed the previous 1994/95 high.
Cotton DemandSeveral factors underlie the long-term trends that will determine domestic and foreign demand for U.S. upland cotton during marketing years 2009-2013.
Per Capita Cotton Fiber Demand up Dramatically. U.S. cotton fiber demand on a per capita basis has seen significant gains since the early 1980s as rising incomes and consumers’ preference for cotton prompted a turnaround. Between calendar years 1966 and 1982, per capita fiber demand for cotton products fell considerably, declining to only 13.5 pounds per person by 1982. Nevertheless, over 80 percent of these products were produced in the United States during this period. That soon changed, however, when imported products grew with the demand rebound, as evidenced by the growing gap between mill demand and total cotton fiber demand.
U.S. Industry Restructuring Began in the 1980s. The U.S. textile and apparel industry began restructuring two decades ago. First, the apparel industry—faced with rising labor costs—began moving offshore as labor-intensive apparel items were finished abroad and exported back to the United States. The Caribbean Basin Initiative and later, the North American Free Trade Agreement sustained the U.S. textile industry for a period as products containing U.S. components received preferential treatment. However, trade liberalization that began during the mid-1990s—along with the Asian financial crisis and the strength of the dollar—diminished these benefits.
As a result, increased import competition required U.S. mills to reduce capacity and further modernize or exit the industry as their customers moved overseas. Also, admission of China to the World Trade Organization (WTO) provided additional access to the U.S. market. Over the past 6 years in particular, the domestic industry has faced intense competition from imported cotton textile and apparel products that have grown considerably and supplanted U.S. cotton mill use. While U.S. per capita cotton fiber demand has steadily risen to 35 pounds recently, only one-third of this is now manufactured in the United States.
Raw Cotton Exports Importance Grows. With the declines experienced in the domestic textile and apparel industries since 1997/98, the relative importance of U.S. cotton exports has grown dramatically. During the early 1980s, when U.S. cotton mill use began a rebound, exports accounted for just over half of the total demand for U.S. upland cotton. As mill use grew, the export share subsequently declined. More recently, however, raw cotton exports and their share of U.S. demand have grown considerably as record world cotton consumption has increased the need for U.S. cotton overseas.
Baseline Projections for U.S. Upland Cotton Supply and UseHighlighted here are key findings for U.S. upland cotton from the baseline analysis for marketing years 2009-2013. Annual projection details can be obtained from the baseline’s U.S. upland supply and use table.
During 2004/05-2013/14, U.S. upland cotton demand is generally projected to offset production, leaving ending stocks relatively stable. However, with the U.S. cotton industry becoming an increasingly export-driven market, supply shocks in the United States and other producing countries could lead to increased annual variability in U.S. cotton demand.
Role Reversal for the Domestic Industry and U.S. Exports. Although the U.S. domestic industry accounted for more than 60 percent of the total U.S. upland cotton demand in 1997/98, the share has been cut to one-third in 2003/04, and is projected to continue to decline over the next 10 years. The U.S. textile industry has faced immense competition from imported cotton products over the last 6 years and the trend is expected to continue as WTO commitments require elimination of the remaining quotas on textile and apparel products at the end of calendar year 2008. By 2013/14, the domestic industry is expected to account for only about 25 percent of the demand for U.S. upland cotton.
In contrast, U.S. upland cotton exports are expected to reach a record in 2009, accounting for two-thirds of projected U.S. demand. As declines in the domestic industry provided additional U.S. exportable supplies over the last several years, the gap between foreign consumption and production provided the demand for U.S. cotton. However, increased foreign competition in 2007/08 is likely to reduce U.S. shipments of upland cotton during the first year of the projection period before rebounding through 2013/14.
U.S. Share of World Consumption Declines. While rising U.S. cotton exports have bolstered the U.S. share of global trade in recent years, the declines experienced by the domestic textile industry have been somewhat offsetting. As a share of world cotton consumption, U.S. cotton disappearance has been on a downward trend since 1994/95 when U.S. cotton accounted for approximately 25 percent of global consumption. In 2009, this share is expected to be near 20 percent, but declines are projected throughout the baseline period as demand for U.S. cotton remains stable and world cotton consumption continues to trend higher with population and income growth. By 2013/14, the U.S. cotton demand share declines to 16 percent.
Global Imports Rise Steadily. Imports will account for about one-third of world use of all cotton (upland and extra-long staple) in 2009. This share is expected to remain relatively stable over the next 5years, and world cotton trade in 2013/14 is forecast at 35.6 million bales, about 10 percent higher than in 2003/04. For hundreds of years, importing countries have accounted for much of the world’s cotton.
Stocks Rise Slightly Before Leveling Off.Incomes, Preferences, and Policy Drive Consumption. Economic growth primarily determines cotton consumption. Changes in taste are also a factor, and policy changes can shift fiber use as well. In China and India, strong economic growth coincided with declining cotton consumption for long periods in the last few decades as domestic policies encouraged rapid growth in chemical fiber production and use as in cases, such as in Russia and Eastern Europe during the 1990s. Demand for cotton grew steadily and, since 1995, total world demand for cotton has grown 1.6 percent per year. Over the 5-year projection period, global cotton consumption is expected to grow about 1.3 percent annually as the global economy expands slightly faster
TradeThe USDA baseline also provides projections for trends in global cotton trade.During the first part of the projection period, upland stocks and the stocks-to-use ratio rise slightly. Ending stocks climb to about 4.7 million bales in 2006/07, while the stocks-to-use ratio increases to about 27 percent. Upland stocks are then expected to level off, as production and demand are about equal. Stocks decline to the 4.3-million-bale level during the latter part of the baseline period, while the stocks-to-use ratio stabilizes around 25 percent, similar to the average over the past 10 years.
After stagnating in the early 1990s, world demand for cotton resumed its long run growth in recent years. The world lost about 12 percent of its demand for cotton during the early 1990s as real gross domestic product in Russia and Eastern Europe fell by about one-third, and as yarn production shifted to countries whose textile industries used fiber more U.S. upland cotton ending stocks and the stocks-to-use ratio in 2004/05 are projected to be the lowest of any year during the 10-year projection period and are considerably lower than just a few years ago. The record production of 2001/02 forced upland stocks to jump and as late as 1979 the imported share of the world’s cotton spinning reached 46 percent. Later, spinning shifted to countries that grow rather than import cotton, and only 28 percent of global cotton spinning used imported cotton in 1998. More recently, major cotton growers, like China, have also become significant importers, raising the imported share of consumption once again.
While many factors play a role in determining cotton production, cotton’s long growing season and need for adequate water and sunshine limit the ability of many countries to produce. Therefore, although the world’s four largest consuming countries—China, India, Pakistan, and the United States—are also the largest producing countries, many important cotton consumers—such as Indonesia, Mexico, and Thailand—produce almost no cotton at all. As a result, a much larger share of the world’s cotton is traded between
Dry land cotton area has expanded in India, West Africa’s Franc Zone, Eastern China, and Brazil. For China and Brazil, this represented a rebound in area back to the levels of the mid-1990s. However, new technology has meant substantially higher yields and production. India’s yields have grown less, and West Africa’s yields actually regressed. In 2003/04, India and Eastern China planted area significantly below previous highs, and West Africa and Brazil have prospects for adding new area in the future. The adoption of insect resistant cotton varieties containing bacillus thuringiensis (Bt) has begun in India and could lead to improvement in the country’s traditionally lagging yields. Brazil’s yields are currently extremely high and future trends there will depend on developments in insecticide resistance in Brazil’s new tropical production zone.
Future Trade Prospects Face Uncertainties
World trade will expand at about the 1.3-percent rate foreseen for expansion in world cotton consumption over the next 10 years, sustaining U.S. exports and the U.S. share of global trade. However, the United States is likely to face continued competition from Australia and West Africa in the coming years. Australia’s 2001/02-2003/04 drought has highlighted the dependence of cotton producers on weather. Australia’s ability to produce even irrigated cotton will continue to depend on the El Nino’s oscillations, and West Africa’s output will depend on the longer cycles that have included sustained precipitation since the beginning of the 1990s. Central Asia is unlikely to return to its former status as the leading U.S. competitor in cotton trade due to both reduced irrigation capacity that limits production and increased domestic production of textiles that keeps more cotton in the region.
Brazil is expected once again to be a major competitor of the United States. Area is expected to grow in states like Mato Grosso, and improving transportation should facilitate shipment to domestic mills and for export. A number of smaller Sub-Saharan countries outside of West Africa—such as Tanzania, Uganda, and Zambia—liberalized their economies during the 1990s and should see production and exports continue to expand during the baseline period.
China and India are expected to continue importing rather than exporting. The impact of Bt cotton on India’s output is a significant uncertainty over the next decade. China’s cotton area in the past has been substantially higher than foreseen in the baseline. With the adoption of Bt cotton, China would be unlikely to import cotton if area returned to its previous highs.
U.S. Industry Is Facing Many Issues
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