Speeches of the ICAC

Title: Major Developments in the World Cotton Industry

Delivered by: Dr. Terry Townsend, Statistician

Delivered to: Textile and Apparel Data Users' Group

Location: Washington, DC USA

Date: 14 December, 1995


Summary

Current estimates of world cotton supply and use suggest that prices will be lower on average this season than in 1994/95, and that prices could be lower again in 1996/97. World production is rising in response to attractive prices, and China(Mainland) is importing less cotton than in 1994/95. However, because of relatively slow growth in cotton production in the largest countries, prices are unlikely to fall substantially below long run averages during 1995/96 or 1996/97.

While the world cotton industry is being affected this season, as is the case every season, by changes in weather, economic growth and patterns of consumer purchases, four structural changes seem to be occurring which might be of longer run interest. First, a shortage of cotton, caused primarily by disappointing yields in the major producing countries, has boosted prices above long run averages since 1993. While year-to-year changes in weather and pest populations cause harvest results to vary, a substantial underlying improvement in the world average cotton yield is not expected during the remainder of this decade. Consequently, cotton stocks are likely to remain tighter, and cotton prices will likely be more volatile and higher on average, than was the case during the 1980s and early 1990s.

Secondly, while different conditions apply in different markets, on a world basis cotton is losing market share to other fibers. The major reasons for cotton's loss of market share include relatively high prices caused by shortages, the expansion of chemical fiber production capacity in third world countries, and a failure by the cotton industry outside the USA to promote effectively.

Third, mill use is moving to countries that produce cotton. It seems that the economics of the textile industry are such that mills in Europe and East Asia are unable to compete with mills in China (Mainland), the USA, India, Pakistan, Brazil, Turkey, and other smaller cotton producing countries. Even in Indonesia and Thailand, where cotton mill use rose steadily during the 1980s, growth is slowing now.

And fourth, the margin between prices for medium and coarse cotton has narrowed over the past decade, suggesting that the structure of demand for cotton has changed in favor of denim and other products made primarily from coarse cotton.

Lower Prices Expected by 1996/97

World production is estimated at 19.5 million tons in 1995/96, the current season, and 20.2 million tons in 1996/97. While representing substantial increases over 1994/95, even the 1996/97 estimate is not record high, reflecting continuing difficulties being experienced in the largest producing countries. In 1995/96, world cotton production may exceed consumption by 3%, and production may exceed consumption by a larger amount in 1996/97. World consumption is also rising, despite probable declines in the USA, Europe and some countries of East Asia. Strong world economic growth and new investment in spinning technology are pushing world mill use of cotton and chemical fibers higher. However, with production exceeding consumption, world cotton stocks are expected to increase this season and next. Declines in the volume of world trade in cotton may occur during 1995/96 and 1996/97, primarily because of reduced imports by cotton producing countries. Based on current estimates of world cotton supply and use, a statistical model indicates that season averages of the Cotlook A Index will be 83 cents per pound in 1995/96 and 72 cents in 1996/97. The average Cotlook A Index during the 22 seasons since 1973/74 has been 73 cents per pound.

China (Mainland) Net Exports Affect Prices

Net exports of cotton by China (Mainland) is a key factor affecting the level of the Cotlook A Index. World cotton prices were boosted in 1994/95 by inefficiency in the Chinese economy. China (Mainland) imports rose to 874,000 tons while exports fell to 45,000 tons, even though production matched consumption. The Chinese cotton economy suffered from a breakdown in the system of state procurement and distribution, combined with political uncertainty and widespread fear of inflation. The near-record level of imports allowed the government to divert domestic cotton into the state reserve, an inventory held for emergency use; the state reserve may now account for half of Chinese (Mainland) cotton stocks, or one-fifth of world stocks.

Imports by China may decline in 1995/96 and 1996/97. Beginning stocks in China (Mainland) this season represented more than six months of use. With production apparently again nearly matching consumption and with cotton flowing into the government system of procurement and distribution because of an increase in the price paid to farmers, supplies in China (Mainland) are ample. Thus, a reduction in imports in 1995/96 seems probable. On the assumption that the Government of China (Mainland) will decide against a further rise in stocks after this season, the estimate of 1996/97 imports is 200,000 tons. Exports from China are estimated at 80,000 tons in 1995/96 and 50,000 tons in 1996/97. Consequently, net exports are estimated at -420,000 tons in the current season and -150,000 tons next season. In the statistical model of the Cotlook A Index used by the Secretariat, an increase of 100,000 tons in net exports by China (Mainland) (an increase in exports or decrease in imports) causes the season average Index to fall by 2 cents per pound.

High domestic prices for cotton provide a partial explanation for continued imports of cotton by China in 1995/96, even though production is expected to nearly match consumption. The price paid to Chinese farmers was increased in September 1995 to 700 yuan per 50 kilograms, or 76 cents per pound, of lint. With ginning and transportation, the cost of domestic cotton delivered to textile mills in China (Mainland) has risen to more than 90 cents per pound, compared with about 60 cents in 1994/95. At market prices prevailing in mid-November, cotton could be imported for less than 90 cents per pound, explaining why textile mills located near ports have an incentive to buy non-Chinese cotton, even when domestic production seems to be adequate.

Tight Supplies Limiting US Disappearance in 1995/96

The US cotton situation presents a classic economic picture of high prices resulting when strong demand is constrained by reduced supply. Textile producers in the USA have become among the most competitive in the world and investment in open end and air jet spinning is continuing. US cotton use rose during nine of the last ten seasons, including an increase of 7% in 1994/95, and if the cotton supply were adequate, US mill use might have risen again this season. However, mill use in the USA slowed after March 1995 as supplies of cotton tightened and because of slower economic growth, and a reduction in use in 1995/96 now seems inevitable.

Because of reduced imports by producing countries, world trade in cotton is likely to fall during 1995/96, and US exports are estimated at 1.6 million tons, down 450,000 tons from 1994/95. The US share of world trade is estimated at 26% in 1995/96, compared with 33% in 1994/95 and an average share since the breakup of the USSR after 1990/91 of 26%. As is the case with mill use, exports of US cotton would be greater if supplies were ample; supply is constraining demand.

The ratio of ending stocks to use in the USA has been at .23 or lower during five of the last six seasons. Only in 1992/93, when barter sales from Central Asia, slow world economic growth and increased exports from China (Mainland) pushed US exports lower, did the US stocks-to-use ratio rise to .30. In 1994/95, because of increased mill use and imports of US cotton by China (Mainland), the US stock-to-use ratio fell to 13%. Symptomatic of a situation where supply is constraining demand, US ending stocks are likely to remain near to, or lower than, 23% of use during this season and next.

World Average Yields Below 5-Decade Trend

Between 1950/51 and 1994/95, the average world cotton yield rose at an annual rate of 2%, or 8 kilograms per hectare per year. However, yields were below the 45-year regression line in the late 1970s and early 1980s as high cotton prices encouraged expansion into lower-yielding areas. Between 1983/84 and 1991/92, the world average yield rose from 450 kilograms per hectare to nearly 600 kilograms largely because of productivity gains in developing countries, especially China (Mainland) and Pakistan. However, world yields were below the regression line in 1992/93 and 1993/94 and just reached the regression line in 1994/95, despite exceptional weather, indicating that the most recent period of above-average gains in yields has passed; the world average yield is estimated at 560 kilograms in 1995/96, 15 kilograms per hectare lower than indicated by the regression line.

World cotton area ranged between 30 and 35 million hectares in most years between 1950/51 and the present, with no apparent tendency to rise or fall. An extrapolation of the 44-year regression line through world yields indicates an average yield in 2000/01 of 620 kilograms per hectare. If world area is 33 million hectares, production would be about 20.5 million tons in 2000/01; if world area rises to 36 million hectares, production would climb to 22.3 million tons five seasons from now.

Per capita world cotton consumption reached 3.6 kilograms in 1987, but fell to 3.2 kilograms in 1994. If per capita world cotton use is to return to the 1987 level and perhaps rise modestly to 3.7 kilograms, world use will need to rise to 23 million tons by 2000/01. However, to achieve 23 million tons of cotton use with yields averaging 620 kilograms, world cotton area will have to rise two million hectares above the record set in 1984/85 to 37 million hectares.

US Yields Not Rising

Production in the USA is estimated at 4 million tons this season and 4.5 million tons in 1996/97. Drawing on experience from the first half of the 1980s, analysts often project a trend increase in US cotton yields of between 2 and 5 kilograms per hectare per year. However, the US average yield reached 791 kilograms in 1987/88 and was only 3 kilograms per hectare higher in 1994/95, seven seasons later; the 1995/96 US yield is estimated at 620 kilograms. Because of changes in economic conditions in the USA, the 1990s may be similar to the 1960s and 1970s when USA cotton yields were flat, despite incremental annual advances in production technology.

The US government cotton program is key to understanding the incentives faced by farmers regarding increases in yields. The US cotton program up to 1974 featured controls on supply through the use of acreage allotments rather than income and price supports, and even between 1974 and 1981 deficiency payments and price-support loans were rarely made to producers because market prices were usually above the target prices and loan rates. Consequently, farmers maximized profits prior to the early 1980s by constraining input use to minimize production costs, and, as a result, the US national average yield did not increase. After 1981, profit maximization strategies changed as government program payments increased and sometimes accounted for more than half of gross farm revenue. During the first half of the 1980s, payments from the US government could be increased by boosting yields, and the US national average cotton yield rose by 30% between 1981/82 and 1987/88. Profit maximization strategies changed again in the mid-1980s when program yields, the yields of record for each farmer on which government payments are calculated, were frozen. Since 1987/88, US farmers have again concentrated on maximizing profits by controlling input use.

Pesticide Resistance Reduces Production in China (Mainland)

Cotton output has been reduced in what were formerly the most important cotton producing provinces of China (Mainland) by failures of pest management. Problems affecting cotton production in China include poor quality planting seeds and ineffective insect control caused by pesticide resistance, an increase in insect numbers because of intercropping wheat and cotton, a failure to till fields during the winter, and incorrect mixing and application of pesticides.

Production in the provinces of Hebei, Henan and Shandong totaled 3 million tons in 1991/92 but fell to 1.7 million tons in 1994/95 and is estimated at 1.5 million tons this season. The problems in eastern China appear to be of a long term nature; yields in Shandong have been declining since 1987/88.

Indian Cotton Yields Remain Below World Average

Cotton area in India expanded by an estimated 9% in 1995/96 in response to high prices, and a further gain may occur during 1996/97. However, production in India seems to be no higher than the 1992/93 record of 2.4 million tons because of disease in the northern producing states, a region which account for about one-third of national production.

Average yields in India remain lower than in the rest of the world despite efforts to improve seed varieties and to expand irrigated area. Progress was made during the 1980s, and the ratio of Indian yields to yields in the rest of the world rose from .35 in 1980/81 to .51 in 1989/90. However because of difficulties in recent years with pests, Indian yields were 47% of the average outside India in 1994/95.

Leaf Curl Virus Present in Pakistan

The 30% decline in production in Pakistan between 1991/92 and 1994/95 is mostly the result of a virus for which no effective chemical defense is available. Efforts are underway to control the leaf curl virus and boost cotton production. The new efforts are in addition to ongoing programs to raise yields by providing better seeds and expanded irrigation. The efforts may be partially successful as varieties are changed and as farmers gain more experience in dealing with disease and pests. However, even with successful control efforts, the leaf curl virus will be present and will reduce yields from what might otherwise have been until virus resistance can be built into high-yielding varieties. A 5-year Common Fund project is underway now to achieve the goal of virus-resistance.

Central Asian Production Still Declining

Production in Central Asia fell from 2.8 million tons in 1988/89 to an estimated 1.9 million in 1994/95 and is not likely to recover in the short run. Reductions in cotton area due to environmental concerns, civil war in Tajikistan and Azerbaijan, low producer prices when adjusted for inflation and exchange rates, and a failure to provide inputs and equipment to farms and farmers are the major reasons behind the declines in output. Central Asian production is not expected to rise during 1995/96 and 1996/97, despite above-average world cotton prices.

Prices Likely To Be Variable and Higher Than Average

Consumer demand for cotton is growing, and with specific problems of disease, resistance to pests and difficult economic conditions in four of the five largest producing countries, prices will need to be above average during the 1990s to elicit the necessary supply.

The last 22 years have seen two distinct periods of cotton prices. Between 1973/74 and 1983/84, the Cotlook A Index averaged 76 cents per pound and was above the 22-season average of 73 cents eight times out of eleven years. However, in the ten seasons between 1984/85 and 1993/94, the Cotlook A Index averaged 67 cents a pound and was below 73 cents seven times. Higher cotton prices during the first period coincided with slow growth in world yields, rising prices for most commodities and increased imports by China (Mainland); cotton prices fell after 1984/85 because of record production in China (Mainland), changes in the US cotton program to expand exports, and reduced cotton consumption in Eastern Europe and the former USSR after 1989/90.

The development of the leaf curl virus in Pakistan and India, combined with economic difficulties in Central Asia and bollworm resistance to pesticides in China (Mainland) indicate that increases in world consumption during the 1990s may need to come from expanded area and production in countries currently accounting for less than half of world output. In the past, above-average prices have been required to sustain increases in area and production in the Western Hemisphere and Africa. Consequently, it is likely that average prices in the 1990s will be higher than in the 1980s; depending on competing crop prices and rates of growth in world cotton consumption, prices in the 1990s could be similar to the 76-cent per pound average of the 1970s.

Cotton's Market Share Record Low

Cotton's share of world textile fiber consumption at the end-use level fell four percentage points to a record low of 46% between 1987 and 1994, and half the loss in share occurred just during 1993 and 1994. Losses in market share occurred in both industrial and developing countries, as well as in Eastern Europe and the former USSR. However, cotton gained market share at the end-use level in North America, Japan, Australia and New Zealand.

The most important factor affecting market share over the long run seems to be price. Cotton prices fell by nearly 50% relative to prices of competing fibers between 1976 and 1986, and cotton's share of the world fiber market rose from 47% to 50% during that period. However, between 1987 and 1994, cotton prices rose relative to weighted average prices of polyester, rayon and wool by 30%, and cotton's market share fell.

A statistical model of fiber consumption suggests that a 30% increase in cotton prices relative to prices of competing fibers is associated with a loss of 1.7 percentage points in world market share. However, other factors besides prices affect market share, including quality and diversity of uses. The decline in cotton's market share between 1990 and 1994 was greater than the loss explained by changes in fiber prices alone, indicating that factors other than prices contributed to the loss in cotton consumption.

Shifts in patterns of fiber consumption in third world countries tied to rising incomes, the development of chemical fiber production capacity in third world countries and inadequate promotion efforts in industrial countries may be contributing to cotton's loss of market share. Cotton's share of the fiber market in North America rose by 13% between 1985 and 1994. In contrast, cotton's market share in Western Europe fell from 38% to 34% of textile fiber consumption at the end use level. With the exception of efforts by the US cotton industry, cotton promotion programs have been greatly reduced or discontinued in industrial and developing countries since 1990. In the USA, cotton promotion and research activities increased from $19 million in 1986 to $47 million in 1994.

Mill Use Shifting to Cotton Producing Countries

A pivotal feature of the world cotton industry during the 1980s and 1990s has been the shift in the location of mill use toward countries producing cotton. Between 1980/81 and 1994/95, cotton use in the ten countries growing the largest amounts of cotton rose from 54% of world consumption to 68%. Outside the ten largest cotton producing countries, cotton use fell from 6.5 million tons in 1980/81 to 5.8 million in 1994/95. Among the ten largest cotton producing countries, mill use rose the fastest in Pakistan (an annual average increase of 11%), Turkey, 7%; and the USA, 6%. Australia, India and Brazil experienced growth in mill use of between 3% and 5% per year; Argentina, China (Mainland) and Uzbekistan experienced growth of between 1% and 3% per year, and consumption in Greece was flat. Among countries that do not grow cotton, mill use rose at an annual average rate of 13% in Indonesia between 1980/81 and 1994/95, 9% in the Philippines, 8% in Bangladesh and Thailand, and 6% in Malaysia. Growth in Hong Kong, the Republic of Korea and China (Taiwan) was 1% per year, cotton use in the EU was flat, and use in Canada, Japan, Eastern Europe and the former USSR declined.

Among the cotton producing countries where mill use is growing the fastest, Pakistan, Turkey, India and China (Mainland) have historically implemented policies to hold domestic cotton prices below world prices for the benefit of their domestic textile industries. Pakistan changed its policies regarding cotton prices in 1995, and tight supplies in Turkey, India and China (Mainland) have forced domestic cotton prices higher in recent years. Consequently, it is not clear that cotton use will continue to rise as rapidly in these producing countries as it did in the 1980s and early 1990s. Since 1985, the USA has operated a farm program which enabled the industry to market cotton to mills at prices lower than those paid to farmers; the marketing loan and Step 2 provisions of current legislation will apparently continue through 2002, and US mill use is likely to continue rising. During the 1980s and early 1990s, some textile mills in East Asia were able to overcome the handicap of having to pay market prices for imported cotton with advantages in other cost areas. However, those advantages, lower labor costs, lower land costs, appear to be dissipating or becoming less important, and slower growth in East Asian cotton use appears likely during the rest of the 1990s.

Stronger Demand for Coarse Count Cotton

Statistics on world cotton supply are organized into six categories based on commonly perceived competitive relationships between cottons of differing quality, variety and geographic origin. Cotton in the coarse count category accounts for one-third of world production and is represented by the Cotlook B Index; cotton produced in Texas and Oklahoma is included in the coarse count category. Cotton produced in the Memphis Territory and the Southeast USA is included in the medium cotton category and is represented by the Cotlook A Index.

Prices indicate that demand for coarse count cotton has become stronger in recent years. The spread between the Cotlook A and B Indexes narrowed from the mid-1980s to 1994/95; between 1985/86 and 1994/95, the Cotlook B Index rose from 84% of the Cotlook A Index to 98%, and during the first four months of 1995/96, the B Index averaged 97% of the A Index. The narrowing of the spread between the Cotlook A and B Indexes during the past decade indicates that the demand for coarse count cotton has strengthened relative to demand for medium cotton. While year-to-year fluctuations in the supply and exports of coarse count cotton have occurred, no systematic decline in production seems to have happened to explain the strengthening of coarse cotton prices relative to prices of other types of cotton. It would seem from the available data on supply that stronger demand for coarse cotton, possibly tied to the increased use of open-end spinning equipment, stronger demand for denim and increased use of HVI equipment, is the underlying reason for the relative strengthening of coarse cotton prices.

Supply and Distribution of Cotton
12 December 1995
Years Beginning August 1
1991 1992 1993 1994 1995 1996
Est. Proj. Proj.
Million Metric Tons
BEGINNING STOCKS
WORLD TOTAL 6.71 9.32 8.74 7.26 7.96 8.59
CHINA (MAINLAND) 1.59 3.24 3.00 2.31 3.25 3.52
USA 0.51 0.81 1.02 0.77 0.58 0.62
NET EXPORTERS 3.14 4.07 4.01 3.39 3.22 3.39
NET IMPORTERS 1/ 3.57 5.26 4.73 3.87 4.74 5.20
PRODUCTION
WORLD TOTAL 20.70 17.98 16.89 18.73 19.52 20.16
CHINA (MAINLAND) 5.67 4.51 3.74 4.34 4.35 4.10
USA 3.84 3.53 3.51 4.28 3.97 4.50
INDIA 2.05 2.38 2.10 2.36 2.38 2.46
PAKISTAN 2.18 1.54 1.37 1.48 1.87 1.80
UZBEKISTAN 1.44 1.31 1.36 1.25 1.27 1.20
TURKEY 0.56 0.57 0.60 0.63 0.84 0.79
OTHERS 4.96 4.15 4.21 4.38 4.85 5.32
CONSUMPTION
WORLD TOTAL 18.40 18.73 18.31 18.44 18.86 19.36
CHINA (MAINLAND) 4.25 4.59 4.44 4.24 4.50 4.50
USA 2.09 2.23 2.27 2.44 2.33 2.55
INDIA 1.90 2.10 2.15 2.24 2.30 2.39
EU & TURKEY 1.76 1.79 1.90 2.05 2.09 2.12
EAST ASIA 2.51 2.37 2.30 2.23 2.23 2.21
PAKISTAN 1.43 1.51 1.51 1.58 1.61 1.65
FORMER COMECON 1.91 1.52 1.13 1.00 1.02 1.05
BRAZIL 0.73 0.79 0.83 0.84 0.90 0.89
OTHERS 1.81 1.82 1.77 1.81 1.89 1.99
EXPORTS
WORLD TOTAL 6.10 5.54 5.90 6.27 6.21 5.70
USA 1.45 1.13 1.49 2.05 1.60 1.65
UZBEKISTAN 1.05 1.30 1.29 1.15 1.04 0.97
FRANCOPHONE AFRICA 0.53 0.53 0.51 0.57 0.63 0.63
AUSTRALIA 0.46 0.37 0.37 0.29 0.28 0.34
CHINA (MAINLAND) 0.13 0.15 0.17 0.04 0.08 0.05
PAKISTAN 0.45 0.26 0.07 0.03 0.30 0.07
INDIA 0.00 0.24 0.07 0.01 0.10 0.00
IMPORTS
WORLD TOTAL 6.32 5.79 5.77 6.64 6.19 5.68
EAST ASIA 2.48 2.25 2.23 2.14 2.23 2.19
EU & TURKEY 1.11 1.19 1.23 1.27 1.22 1.32
FORMER COMECON 1.55 1.16 0.85 0.93 1.03 0.94
CHINA (MAINLAND) 0.36 0.05 0.18 0.88 0.50 0.20
SOUTH AMERICA 0.22 0.50 0.54 0.47 0.55 0.43
TRADE IMBALANCE 2/ 0.22 0.26 -0.13 0.37 -0.02 -0.02
STOCKS ADJUSTMENT 3/ 0.10 -0.09 0.07 0.04 -0.01 -0.01
ENDING STOCKS
WORLD TOTAL 9.32 8.74 7.26 7.96 8.59 9.36
CHINA (MAINLAND) 3.24 3.00 2.31 3.25 3.52 3.27
USA 0.81 1.02 0.77 0.58 0.62 0.92
NET EXPORTERS 4.07 4.01 3.39 3.22 3.39 4.24
NET IMPORTERS 1/ 5.26 4.73 3.87 4.74 5.20 5.13
ENDING STOCKS/USE 4/ 0.45 0.40 0.36 0.39 0.38 0.42
COTLOOK A INDEX 5/ 63.05 57.70 70.60 94.30 83* 72*
1/ Includes Brazil, China (Mainland), Colombia, Mexico, Turkey and traditional importers except Greece.
2/ The inclusion of linters and waste, changes in weight during transit, differences in reporting periods and measurement error account for differences between world imports and exports.
3/ Difference between calculated stocks and actual; amounts for forward seasons are anticipated
4/ World-less-China (Mainland) ending stocks minus China net exports, quantity divided by world-less-China consumption.
5/ U.S. Cents per pound. Model results for 1995/96 and 1996/97 are based on net China (Mainland) trade, ratios of world-less-China (Mainland) ending stocks to use, barter sales from Central Asia, and futures prices. The estimate for 1994/95 is adjusted for quotes during June and July.
*/ 95% confidence intervals extend 9 cents per pound above and below each point estimate.


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