Total use (demand) or off-take of the 2006 U.S. cotton crop is expected to fall by two and a half million bales or 10.5 percent from 2005. If realized, this would be the first decline in usage of U.S. cotton since 2000.
The decline in use, however, mirrors the drop in the size of the crop by almost exactly the same amount. Thus, ending stocks are expected to remain the same.
With the smaller U.S. crop, if use were not also down, we would be talking about a much brighter price picture than we currently have.
By most accounts, 2005 was a very good year export-wise with exports totaling just over 18 million bales or 75 percent of U.S. production. But the U.S. export market share (defined as/measured by U.S. exports as a percentage of total world exports) fell for 2005. This was the first decline in market share since 1998.
Based on USDA's November estimates, market share is forecast to decline again for the 2006 crop marketing year. China is the largest user of U.S. cotton exports. For the 2005 crop, China accounted for 50 percent of all U.S. exports followed by Turkey, Mexico and Indonesia.
China's mill industry has expanded dramatically in recent years and the “gap” between its production capability and usage continues to grow — although just slightly for 2006.
In 2005, China produced 26.2 million bales compared to mill use of 45 million. For 2006, China's production is forecast to increase to 30 million bales and use is expected to increase to 50 million bales.
China is expected to import less cotton this year. This is because they imported a large quantity of cotton for 2005-06 which actually resulted in a buildup in stocks on-hand going into the 2006-07 marketing year. And, as mentioned, production is also up.
In recent years, the United States has supplied 40 to 60 percent of China's imports. The need for imports is a function of China's production versus mill demand and factors that impact mill demand. The demand (need) for U.S. exports is a function of this and the availability (production) and price competition from other exporting countries.
One potentially troubling sign is that although U.S. exports (not just to China but in total) have been increasing, and China's production-use “gap” previously discussed has been widening, the U.S. share of China's total demand for imports has been declining.
Share has declined from 61 percent for the 2002 crop year to 47 percent for the 2005 crop year. As the United States has become more and more reliant on exports (75 percent of production for the 2005 crop, for example, and a projected 76 percent for the 2006 crop), one of the things we've learned is that a growing world demand for cotton and high exports for the United States is not necessarily the trigger for higher/better cotton prices for the producer.
If anything, prices have struggled most years to even keep near or above the loan rate.
It has been said (other analysts and observers have commented) that the United States is a “residual supplier” of cotton.
I interpret this to mean that, although we are the world's largest cotton exporter, we are not always the first or most preferred source for imports. What determines this? Well, among other things, availability of competing supplies and price.
Prices for the 2007 crop (Dec. 07 futures) are currently at about 59 cents per pound. That's about five to six cents above the current 2006 crop (March 07 futures). So, this is a signal that the market already recognizes that something about the 2007 crop might be different from the 2006 crop. Acreage for 2007 may be down. There's not much to be gained at this point arguing about how much. There are many factors that, in the end, will determine what farmers decide to do.
If acreage is down by one million acres (which would put us about where we were in 2005) the crop could still make 22 million bales depending on yield and abandonment. If acreage is down by one and a half million acres (which would place us close to 2004 acreage) the crop could still make 21 million bales.
From a 21-million to 22-million bale crop, we can back out five million or so for U.S. mills and that would leave a maximum of 16 to 17 million bales for export without a drop in ending stocks. This level of exports and resulting ending stocks would be about where we are for the 2006 crop. Yet, prices for the 2007 crop are already near 60 cents.
If foreign mill use continues to trend upward, prices should be supported (justified) at this higher level, particularly if foreign production should decline next season (revert back closer to 2005 levels). A continued increase in foreign production (up by about 5 percent this year, for example), however, would make it tougher to sustain the optimism.