The U.S. cotton industry's economic health will be affected by cotton's ability to regain global market share relative to manmade fibers. Stronger demand gives the U.S. industry a better chance to continue its current raw cotton export pace.
In presenting the National Cotton Council's 2006 Economic Outlook to delegates at the organization's annual meeting Monday, Gary Adams, the NCC's vice president, Economics and Policy Analysis, says, "As we look at challenges facing the global market, the ability to increase demand and regain market share relative to manmade fibers is paramount."
Adams says even though an estimated record 2005/06 world cotton consumption of 116.8 million bales is well below total manmade fiber use of 180 million bales, there is reason for optimism. Fueled by growth in China, India and Pakistan, world mill cotton use for 2006/07 is projected at 119.8 million bales, higher than the projected world production of 116.2 million bales.
"With projected consumption exceeding production, stock levels are forecast to fall during 2006/07, creating a balance sheet a bit more supportive of prices," Adams says. "However, weather and yield anomalies will be a primary factor ultimately determining production and prices."
Adams says the economic outlook for the U.S. cotton industry is directly affected by China which "is on pace to be the largest consumer of U.S. cotton." He says that China is the world's largest cotton producer with 27.9 million bales projected in 2006 and also is the world's largest cotton spinner at 48 million bales. "China has emerged as the largest importer with potential purchases of 17 million bales (global) in the current marketing year," Adams says. "The U.S. cotton industry's ability to export 70% of the crop as raw fiber will depend on significant cotton imports fueled by China's expanding textile industry."
The economist also notes, though, that to protect the U.S. textile industry's economic health, it is imperative that Chinese textiles are not unfairly dumped into the export market.
"The U.S. textile industry is expected to remain under pressure, but further losses in mill use should be mitigated by the current agreement limiting textile imports from China," he says.
Adams says for 2006-07, U.S. mill cotton use is projected at 5.75 million bales, as compared to USDA's estimate of 5.90 million bales for 2005-06. He projects U.S. cotton exports for 2006-07 at 15.83 million bales, below USDA's current 2005-06 estimate of 16.4 million. The export decrease, he says, reflects a recovery in foreign cotton production - primarily larger crops from China, India, Pakistan and Turkey - and also the pending loss of Step 2 after the 2005-06 marketing year. "The Step 2 provision has served the industry well since its inception in 1991 by enhancing competitiveness of U.S. cotton and increasing overall offtake," Adams says. "The loss of the program only increases the challenge of being competitive in the world cotton market."
In their Planting Intentions Report released February 10, NCC economists say their survey shows 2006 U.S. cotton acreage increasing 1.7% from 2005. The survey revealed 2006 intentions of 14.12 million acres of upland cotton and 312,000 acres of extra long staple cotton for a total of 14.44 million acres. The survey found that planting increases in the Southeast and Mid-South will offset declines in the West. Yield and abandonment produce a U.S. crop of 21.41 million bales, down from the 2005 record of 23.72 million bales.
Adams says the average costs of producing the 2006 crop will likely be higher than 2005 as diesel and fertilizer prices are still above year-ago levels. The increased costs are a direct hit on the producer's bottom line. He says those higher production costs, coupled with current policy challenges, only add uncertainty to the economic outlook.
"In the face of these challenges, supplying and promoting a quality product along with maintaining an effective farm program, will be critical to future successes," Adams says.
For details on the 2006 Cotton Economic Outlook, go to www.cotton.org/econ/reports/annual-outlook.cfm.