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COTTON AND WOOL OUTLOOK

U.S. Cotton Supply, Demand, And Stocks Projected Higher In 2000/01

(May 15, 2000) The first official U.S. Department of Agriculture (USDA) forecast for the 2000 season projects U.S. cotton production at 19 million bales. Based on the March Prospective Plantings report, cotton planted area for the 2000 crop is expected to reach 15.6 million acres, 5 percent above 1999. Assumptions of average abandonment and yield were also made in reaching the production forecast. Harvested area of 14.4 million acres is based on the previous 10-year average abandonment, weighted by state. Likewise, the national yield forecast of 635 pounds per harvested acre is based on the 1990-99 crop yields, weighted by state. If realized, U.S. cotton production in 2000 would rise 2 million bales (12 percent) from the final 1999 production estimate.

With U.S. beginning stocks currently estimated at 4.3 million bales for 2000/01 and production projected to exceed total demand, cotton stocks are expected to rise next season. In 2000/01, U.S. mill use is forecast to expand slightly to 10.2 million bales. Although consumer demand for cotton products continues to be impressive, most of this demand is being satisfied by imports. Record cotton textile and apparel imports of 15-million-bale equivalents of raw cotton are expected in 1999/2000, with further increases seen again next season. However, many of these imports will contain U.S. cotton and is expected to bolster U.S. raw cotton exports in 2000/01. In addition, a decline in foreign production along with rising consumption next season provide an initial U.S. export forecast of 8.0 million bales. Based on these early 2000/01 supply and demand estimates, U.S. cotton stocks would rise about 19 percent (800,000 bales) to 5.1 million bales by July 31, 2001, a stocks-to-use ratio of 28 percent.

As of May 7, U.S. cotton planting progress was running ahead of both last season and the 5-year average. Thirty-seven percent of the U.S. crop had been planted as of May 7, compared with 31 percent a year ago and an average of 34 percent. Leading the way is California, where plantings were estimated at 98 percent complete. This is well above normal in a state where planting progress has been proven statistically significant in its yield outcome. In addition to California, other states including Missouri, Mississippi, and Louisiana have planted a larger percentage than normal of their cotton crop. As of May 7, Texas was reported at only 20 percent complete as peak planting time on the High Plains gets underway.

Summary Of The World Outlook For 2000/01

World production is forecast to fall in 2000/01 compared with the year before, in response to: lower cotton prices during the 1999/2000 marketing year to date, competing crop prices that fell less than cotton during 1999/2000, and a return to more normal yields by several major producers. At 67 million bales, foreign cotton production is forecast about 3 million bales lower than during the year before, and its lowest since 1994. While USDA will not release official country-level estimates until July, it seems reasonable at this point to expect lower crops than the year before in China, Central Asia, Pakistan, and India. Together, these four producers account for about two-thirds of foreign production.

World consumption is forecast to rise in 2000/01 compared with the year before, in response to: lower cotton prices during the 1999/2000 marketing year to date, competing fiber prices that have risen relative to cotton, and a return to more robust economic growth in a number of regions that have suffered slow or negative growth in recent years. At 82 million bales, foreign cotton consumption is forecast about 1.7 million bales higher than during the year before, and its highest ever. In percentage terms, foreign consumption is expected to be 2.2 percent higher than the year before in 2000/01, compared with an 8-percent annual increase reported in 1999/2000.

World stocks are forecast to fall in 2000/01, dropping 6.0 million bales to 36.5 million bales, or from the equivalent of 47 percent of world consumption to the equivalent of 40 percent. However, as was true during 1999/2000, China could account for a disproportionate amount of the stock adjustment. Lower beginning

stocks, lower production, and higher consumption of cotton by China seem likely, and while China's trade policies may be changing, it is difficult to imagine revisions to current trade policies sufficient to offset these negative factors. Foreign stocks in 2000/01 are forecast 6.8 million bales below the year before, at 31.5 million bales, the lowest since 1994/95.

Lower Production In China

Lower cotton production in China during 2000/01 seems likely given the large decline from 1998/99 official procurement prices that the liberalized cotton market in China underwent during 1999/2000, and given official statements that reduced cotton production is an economic goal for the government during 2000. Official policy, economic incentives, and past experience all suggest Xinjiang's area would decline little if at all, thus, a continuation in China's upward trend in its national average cotton yield seems plausible. However, production could fall as planted area outside of Xinjiang drops.

Since 1994, China's non-Xinjiang cotton area has declined by more than 2 million hectares. To illustrate the magnitude of this decline, if these 2 million hectares represented a cotton-producing country, that country would have the fifth largest area of any in the world. China's 1999/2000 area was about 700,000 hectares smaller than during the year before, and at 3.75 million hectares was the smallest area since 1962. When one considers that in 1962 Xinjiang's area was probably negligible, then China's 1999 non-Xinjiang area of about 2.75 million hectares was probably the lowest since sometime in the 1950's. Another decline is widely expected in 2000/01, but less than the 20 percent drop seen in 1999.

Three reasons for expecting a smaller rather than larger decline in the next marketing year are: 1) a rebound in prices within China in recent months; 2) growing use of genetically modified cotton in Eastern and Central regions with associated costs savings; and 3) the possibility that producers already incorporated much of the 1999 price changes into their expectations when undertaking 1999 planting, limiting the impact of lagged prices on the 2000 crop.

The last point deserves further elaboration. In the past, China's cotton production response to price changes has been larger with one year's lag than during the current year. During the 1990's, this has reversed, and the correlation with current year prices has become stronger than the correlation with lagged prices. Obviously, production decisions depend on more than the published price of cotton, but this correlation suggests price expectations in China may be more forward looking than in the past.

If farmers in 1999/2000 were adjusting very rapidly to price signals, if they were forming expectations rationally, then they knew prices would drop substantially in 1999/2000 and responded accordingly. Now, industry reports from China suggest farmers may expect prices to rise or stay at recently elevated levels. However, producers in China may still be foreseeing prices during 2000/01 below those they foresaw at planting for 1999/2000, and could plant less this year. Alternatively, if farmers in 1999/2000 were responding to government edicts, then the official forecast/goal of a 3.2-million-ton crop suggests official government efforts would still be to discourage area.

Other Producers

Central Asian production jumped by more than 800,000 bales from the year before in 1999/2000, largely due to a 14-percent jump in Uzbekistan's yields. Turkmenistan's government reported a surge in cotton production as well, but those reports to date have been widely discounted. Assuming that Turkmenistan's crop again remains nearer to its 1998 level than to the larger figures published by the government, then a return of Uzbekistan's yields to something closer to an average of recent years could bring Central Asian cotton production down a few 100,000 bales from its strong 1999/2000 performance.

Pakistan also saw its yield and production surge from the year before in 1999/2000, but price and weather developments during the last year suggest that a lower crop can be expected from that country in 2000/01. Prices fell substantially, reportedly discouraging some producers from considering the crop in 2000/01. In addition, Pakistan's yield soared 26 percent from the year before in 1999/2000, reaching a level only bested by the unusually high peaks of the early 1990's pre-leaf curl virus period, and a return to more average yields is therefore likely. Also, a period of reduced precipitation has reportedly reduced supplies of water for irrigation.

With respect to India, slightly lower production seems likely, as cotton prices have generally been below year-ago levels for 2 years running, and farmers are likely to respond by planting less cotton. India's crop in 1999/2000 was bolstered by increased yields in the Punjab and Haryana, and more normal conditions would suggest that that region might produce somewhat less in 2000/01. Much of the rest of India depends on the performance of the monsoon, which has generally performed favorably in recent years, although Gujurat in 1999/2000 was an exception.

Foreign Consumption And Trade

Cotton consumption is far more dispersed than production, and temporary consumption shortfalls or excesses due to local conditions can induce offsetting declines elsewhere in the world through competition in world textile trade. Thus, there is little point at this time of the year in disaggregating the foreign consumption forecast any further. However, the world's largest consumer, China, seems more likely to raise than lower consumption, given the pronounced rebound in textile production witnessed recently. The potential shortfall in China's production relative to consumption merits discussion because of its potentially significant impact on world trade.

China's availability of domestic cotton during 2000/01 will be substantially lower than the year before due to reduced beginning stocks. Beginning stocks for China in 2000/01 are forecast about 5 million bales below the year before, and the likelihood of lower production suggests an even greater decline in total supply. China has been a net exporter for the last 2 years, 1998/99 and 1999/2000, but was a substantial net importer during the 4 preceding years.

An analysis of stocks/use ratios is not indicative of either a strong net import or net export position for China in 2000/01. Continuation of exports at the current season's level would imply a stocks/use ratio for China of 42 percent, startlingly below the 71 percent USDA estimates for 1999/2000. However, China's average stock/use since 1975 has been 46 percent and virtually no significant Northern Hemisphere cotton-producing country holds stocks equivalent to 50 percent or more of use. An assumption of balanced net trade for China's cotton in 2000/01, combined with a 500,000-bale decline in production and a 500,000-bale increase in consumption, would bring China's stock/use ratio to just below 50 percent.

While one might object that any analysis of China's stocks should include a discount for "phantom" stocks, at least some published figures from China are consistent with an even higher stock level than USDA's. And while some of the stocks consumed under this scenario would be older and lower quality than those ordinarily acceptable in developed countries, China does have a more heterogeneous textile industry with greater opportunities to accommodate lower quality cotton with increased use of labor.

World Trade And U.S. Exports Rising

Since neither a significant reduction nor increase in China's net trade position seems to be necessitated solely by changes in China's supplies, world trade in cotton is likely to maintain its current relationship with world consumption during 2000/01. During the last 3 years, world imports have averaged 30 percent of world consumption. In recent years this share has only been exceeded when China is a major importer, which is difficult to foresee at this point. This would suggest imports of 28 million bales and exports of 27.7 million.

With world trade expected to be about 1 million bales higher in 2000/01 than in 1999/2000, higher U.S. exports are likely. The outlook for higher U.S. exports area is also supported by an expected increase in U.S. supplies and reduced prospects for competition from China. Other major exporters are likely to increase exports only slightly as reduced production largely offsets the increased carryin from the 1999 crop, keeping available supplies about unchanged. At 8 million bales U.S. exports are expected to be 1.4 million bales above the year before and account for 29 percent of world trade, the highest since 1994.

U.S. 1999/2000 Estimates Revised Slightly

Small revisions were made this month to USDA's supply and demand estimates for 1999/2000. First, the National Agricultural Statistics Service (NASS) finalized 1999 U.S. cotton production at 16.97 million bales, up marginally from last month's estimate. As a result, total cotton supplies this season are estimated at 21 million bales, which includes an estimated 100,000 bales of imported raw cotton.

On the demand side, the export forecast was raised to 6.6 million bales, 100,000 above April's estimate. As of early May, shipment data reported in Export Sales indicate that nearly 5.2 million bales of U.S. cotton had already been exported, with recent weekly shipments near 200,000 bales. Although normal seasonal patterns would imply a slower shipment pace during the next 3 months, exports need only average about 115,000 bales per week through the end of the season, well within reasonable expectations, as 2 million bales of commitments remain to be shipped. With the revised export forecast and no adjustment made to U.S. mill use this month, total demand improved to 16.7 million bales. As a result, 1999/2000 ending stocks are currently estimated at 4.3 million bales, about 300,000 above beginning levels.

Textile Trade Deficit Increases In 2000

February textile exports, at 400 million pounds (raw-fiber equivalent), increased 12 percent from January and were 13 percent above February 1999. Overall, textile exports were higher for all major fibers and all end-use categories. Cotton textile imports rose to 180 million pounds, 11 percent above January and 10 percent above a year ago. Shipments to North American countries accounted for 89 percent of the total. Mexico, Canada, Honduras, and the Dominican Republic remained the largest buyers of U.S. cotton textiles and apparel. Compared with a year earlier, cotton textile exports increased to North America, South America, and Asia, while shipments decreased to Europe, Oceania, and Africa.

Textile imports totaled 1.03 billion pounds, up 4 percent from January and 15 percent above February 1999. Overall, increases in cotton and manmade fiber textile imports more than offset slight declines in wool, linen, and silk textiles. Also, a large increase in apparel imports more than offset lower shipments of all other end-use categories. Cotton imports, at 590 million pounds, accounted for 57 percent of total imports in February and were 10 percent above January. In addition, textile imports during the first 2 months of 2000 were 15 percent above the corresponding period of 1999, and cotton textile imports were up 14 percent. Asian textile-producing countries remain the most important source of cotton textile imports, accounting for 47 percent in February 2000. However, North America continues to increase market share of cotton textiles, accounting for 42 percent of all cotton shipments, compared with 36 percent in January.

For all fibers, the textile trade deficit during January and February totaled 1.3 billion pounds, 18 percent above a year earlier. The cumulative cotton trade deficit was 17 percent higher than the first 2 months of 1999. However, cotton's share of the trade deficit declined from 63 percent to 61 percent in 2000 compared with a year earlier.

May 15, 2000

Economic Research Service

USDA, Washington, D.C.

202-219-0515

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