Cotton Situation and Outlook
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Carl G. Anderson
Professor and Extension Economist-Cotton Marketing
Department of Agricultural Economics
Texas Agricultural Extension Service
College Station, Texas 77843-2124
Introduction
The world cotton situation for 2000/01 crop includes strong demand, lower foreign
production and larger U.S. production than last season. In the U.S., increased textile imports are
slowing domestic mill use. As a result, the offtake of U.S. cotton is largely dependent on the
volume of export shipments. However, because foreign supplies are decreasing rapidly, the
export market is strong, indicating slightly higher prices in the last half of the 2000/01 marketing
year.
Global supplies are declining but appear fairly adequate. Domestic and export use in the
U.S. are expected to total slightly less than the 18.3 million bale crop estimated in September.
Therefore, fairly weak futures prices in the 62 to 69 cent range are likely this fall. Prices may
strengthen in the last half of the 2000/01 season because China will probably return to importing
some cotton. Fewer foreign stocks are providing support for a stronger AA@ Index relative to
increased U.S. production and a weak market. The result is a lower loan deficiency payment
(LDP) for U.S. producers, if any, from over 20 cents per pound during the 1999 harvest.
Although world consumption is expected to reach a record level in excess of 92 million
bales, the level of supply, depending on the 2000/01 world crop size, will be a major influence on
the market this harvest season. The projected 87 million bale crop is expected to fall 5 million
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Presented at 2000 Southern Regional Outlook Conference, Atlanta, Georgia, September 27, 2000.
bales short of global mill use. That is the largest deficit gap in production versus use since the
1993 season.
U.S. Residual Cotton Supplier to Foreign Market
The most significant factor in decreasing the foreign supply is the drawdown in China=s
cotton carryover stocks to around 10 million bales from a large 21 million bales at the beginning
of the 1999/00 season. However, in the U.S., increased imports of textiles are slowing domestic
mill use. Consequently, the U.S. cotton price is largely dependent on the volume of exports.
Because of declining foreign supplies, the export market is strong, around 8 million bales for the
2000/01 season.
This leaves the U.S. producer mostly a residual cotton supplier to the international market.
Thus, even more volatile price movements and greater market uncertainty can be expected in the
future. Prices and amount of U.S. exports will have a tendency to move up and down together.
Therefore, during years of plentiful foreign supplies and low prices, producers can not depend on
exports and trade agreements to be of much support to cotton income.
Increased U.S. Production and Use Expected for 2000/01 Crop
The USDA estimate of 18.3 million bales of all cotton as of September 2000 is up
substantially from 17.0 million last year and 13.9 million two years ago. Consequently, U.S.
cotton supplies are likely to exceed 22 million bales. In 1998/99, the total supply was only 18.3
million. For the 2000/01 season, the U.S. is expected to have the largest production increase in
the world.
The enactment of the AUnited States - Carribean Basin Trade Partnership Act@, which
becomes effective October1, 2000, may help sluggish domestic mill use. The Act provides for
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reduced tariff rates for specific apparel products and quantities imported from the Carribean
Basin Initiative (CBI) countries if the products are made from yarn or fabric wholly formed in the
U.S.
Despite the prospects for increased U.S. export shipments near 8 million bales, the largest
exports since 1994/95, carryover stocks are expected to rise slightly over last season to 4.2
million bales.
Less Foreign Production and Stocks Benefit U.S. Exports
Foreign cotton production in 2000/01 is forecast at 68.4 million bales, slightly under a year
earlier. Foreign consumption is expected to be a substantial 82.4 million.
Little change from the reduced production last season is expected in China. China=s cotton
acreage decreased 16 percent to 9.2 million acres from the year before in 1999/2000. That was
the lowest level reported since 1962. A large decrease in procurement prices in China during
1999/2000 encouraged Chinese farmers to decrease planted acreage. Farmers in India are likely
to produce about 12.3 million bales, the same as in 1999/2000.
Improved global economic prospects and relatively good consumption in China, India and
Russia support increased foreign cotton use. China=s mill use advanced during 1999/2000
because of lower cotton prices and restructuring of the textile industry that improved profitability
and exports. Cotton fiber consumption increased 2.8 million bales in China during 1999/2000,
reaching a record 22 million bales.
India, the world=s second largest consumer of raw cotton fiber, is expected to increase mill
use by 300,000 bales during 2000/01 from the previous year. During the early 1990's, India
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reformed its economy, which has resulted in substantially increasing textile exports, economic
growth, and cotton use.
Cotton consumption in Russia increased a sizable 600,000 bales during the 1999/2000
season. They are expected to continue increasing consumption, but at a slower pace. The
outlook for Russia=s economy in 2000 and 2001 indicates the strongest growth since the 1980's.
Use is also expected to gain in Brazil, Indonesia, Mexico, Pakistan, and Turkey. However, less
consumption than the year before is likely in Japan, Egypt, Hong Kong, and Zimbabwe.
Because of the expected improvement in foreign consumption, world cotton trade will likely
increase. With increased acreage and supply in the U.S., export shipments are expected to
greatly benefit from the decrease in foreign supply.
World Stocks Decrease
For the first time since 1994, world ending stocks are expected to decline 5.6 million bales
to 34.4 million during the 2000/01 marketing year. However, stocks dropped to 26.8 million in
1993, ahead of the big price rally in 1994 and 1995. Most of the global decrease in carryover
stocks stems from China. China=s carryover stocks are forecast to decline 4.7 million bales in
the 2000/01 season to 10.3 million bales. Because of increased use and reduced production,
Chinese stocks dropped 6.2 million bales in 1999/00. That indicates a 10.9 million bale drop in
carryover stocks in two seasons. Stocks are also expected to decrease in Pakistan and India.
Increased Dependence on Exports Indicates More Price Variation
Producers in the U.S. are becoming more dependent upon exporting cotton as domestic use
declines. Prices and the amount of U.S. exports will have a tendency to move up and down
together. When foreign supplies are decreasing, the world price goes up. Consequently, the need
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for U.S. cotton increases as the price rallies and export shipments increase. But, when foreign
supplies increase, the cotton price and U.S. exports decrease.
For the 2000/01 season, foreign production is expected to equal only 83 percent of the
projected 82 million bale use. If realized, 17 percent or about 14 million bales of foreign use
must come from stocks and from U.S. exports. In 1995/96, foreign countries, including China,
produced 100 percent of their combined use. And, as late as 1998/99, these foreign countries
produced 95 percent of their use.
Strong World Demand Supports Market for 2001
Cotton consumption is expected to remain strong for the 2001 crop year. Increased use of
cotton in Central Asia, especially in the Republic of Russia, and fewer stocks in China are
expected to keep the world cotton supply low enough to maintain a firm market.
However, higher prices for the 2000 crop will likely encourage more foreign acreage and a
larger crop next season. Yet, the foreign production to consumption deficit gap should remain
fairly large, around 10 million bales. A large gap between foreign production and consumption
provides U.S. growers the opportunity to maintain strong export shipments.
Price for 2001 Depends on Foreign Acreage and Resulting U.S. Exports
Changes in foreign cotton acreage and supplies drive the need for U.S. cotton in foreign
markets. Foreign cotton acreage has been fairly responsive to price changes in the AA@ Index
during the last decade. Foreign acreage dropped 10 million acres from 73 million in 1991/92 to
63 million in 1993/94. When price rallied to 91 cents per pound in 1995/96, acreage increased
back to 73 million. Since then, high price subsidies in China encouraged their farmers to
continue planting cotton, despite the lower market prices in 1998 and 1999. However, the latest
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reform in China=s domestic cotton program toward much lower farm prices should bring their
supplies in line with consumption.
For the 2000/01 season, foreign production is expected to fall around 14 million bales short
of use, slightly more than the 11 million bale deficit in 1999/00. That is a much greater shortfall
than the 3 to 4 million bales during the 1997 and 1998 crop seasons. Too, the outlook for the
2001 crop indicates the foreign crop may be some 10 million bales less than consumption.
With the large foreign production deficits for the 2000 and 2001 crops, the potential for
U.S. export shipments could be in the 8-9 million bale range for the 2000 crop year and 7-8
million in the 2001 crop season.
The foreign production-to-use percentage is another way to understand their production
response to higher and lower prices. In the last 25 years, the percentage of foreign production
has dropped only twice to the 81 percent of use level. That was in 1986/87 and in 1993/94.
However, for this year=s crop, foreign production is expected to be around 83 percent of use
because of last season=s extremely low prices. In the past, low price years preceded several
years of higher prices. The low price of 58 cents in 1992/93 was followed two years later by 91
cents in 1994/95.
Expect Same U.S. Acreage Next Season, a Plentiful Supply, and Stable Market
Cotton producers will likely plant about the same acreage for the 2001/02 crop as the 15.5
million this season. With low grain and soybean prices, producers are expected to keep the same
rotation patterns and acreage of different crops.
Early indications for the 2001/02 cotton crop suggests carryover stocks may increase to
around 5 million bales by August 2002. Average yields indicate a 19 million bale crop that
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would exceed total use of about 18 million. These Aballpark@ estimates point to a stable market
in the 62 to 72 cent per pound range for December >01. The AA@ Index is expected to remain
firm around the 65 to 75 cent level.
With the current farm program provisions of no set aside acreage, the U.S. supply of cotton
will likely continue to outpace annual demand. It will take higher grain and soybean prices
and/or another weather reduced crop to bring supply into balance with use sufficient to hold
futures prices above 70 cents. Most producers need a farm price of 65 cents or better to cover
expenses and basic living costs.
Develop Marketing Plan With Basic Pricing Strategies
Successful producers will need to prepare and implement a price risk program. Put options
provide price insurance and allow benefits from higher prices. Buying puts and selling out-ofthe-money call options are workable. However, buy a put and sell a call strategy (a window)
needs to be monitored if a strong price rally develops and hits the price ceiling.
Forward contracts tied to the Commodity Credit Corporation (CCC) loan discount schedule
may have larger discounts than the market offers at harvest. Contracts provide a price floor and,
when used alone, a price ceiling as well.
Because of payment risk and other stipulations, and wide basis values offered in some
forward contracts, many producers are using the marketing associations and gin pools to market
their cotton.
Group marketing has the advantage of attracting several buyers, hiring full time marketing
expertise to manage price risk, and the volume to market over a longer time period than is
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practical as an individual. Check the Texas Agricultural Extension Service web site at:
agecoext.tamu.edu/ for further information concerning pricing strategies, risk management, etc.
Conclusion
It appears that another upward price trend has started because of reduced world supplies.
The AA@ Index has increased from44 cents per pound in early January to over 61 cents in
August. If past price movements repeat, then U.S. cotton prices should trend higher for the next
several years. Yet, the tendency to plant 15 million or more acres of U.S. cotton will probably
dampen any sustained rally above 70 to 75 cents.
Given the economic incentives across countries to produce, consume and export cotton or
textiles, cotton prices are expected to continue highly variable. Clearly, producers worldwide
respond to higher prices by increasing acreage. Increased supplies result and lower prices follow
for several years. Likewise, lower prices discourage production, encourage use and higher prices
result. Thus, the basic economic forces of higher and lower price levels drive changes in the
cotton market. However, these market forces and trade liberalization indicate world prices may
average lower than in the past.
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