The good news from the 2004 cotton crop is that U.S. growers may qualify for the maximum government payment. The bad news is that they'll need every penny of it if they expect to see anything like a profit from what is shaping up to be a record-breaking crop worldwide.

“The latest USDA estimate puts world cotton production at 106.5 million bales,” said Gary Adams, National Cotton Council vice-president of economics and policy analysis.

Adams, who offered an economic outlook at the National Cotton Council's mid-year meeting recently in Asheville, N.C., said world production could be up 12 million bales over last year and 8 million more than the 1998 record crop.

“The foreign crop could top 86 million bales,” Adams said. That includes a projected 30-million bale crop from China, 12.75 million bales from India, 8.75 million from Pakistan, 6 million from Brazil and 2.3 million bales from Australia. The U.S. crop is estimated to top 20 million bales.

Much of that increase comes from expanded acreage, which is up 8 percent (outside the Untied States). “Chinese acreage is up 13 percent over 2003,” Adams said. India expanded acreage by 6 percent; Pakistan is up 3 percent and Brazil added 2 percent.

But analysts also expect good yields to play a role. “The foreign yield will come in above the 10-year threshold,” Adams said. “USDA's 106.5 million-bale estimate depends on optimistic conditions through harvest. But 102 million bales or less is unlikely without a significant surprise.”

Adams said the U.S. cotton crop increase comes primarily from excellent growing conditions. “Overall, U.S. acreage rose only about 3 percent,” he said. “But crop conditions show significant improvement over the same time last year. Some 70 percent of the U.S. crop is rated good to excellent, a record level, and most regions (in the U.S. Cotton Belt) are expected to do well.”

He said Louisiana ratings are the lowest, showing 24 percent of the crop in poor and very poor condition. But California rates 25 percent of the crop good and 75 percent excellent.

“A lot of the Texas crop rates good to excellent as well,” Adams said.

Most of the cotton acreage expansion comes from foreign producers. “The Untied States produces about 19 percent of the world's cotton and that has not changed much in the last 10 years. China and Brazil, however, have a lot of potential to expand. For the last three years China has accounted for 26 percent of the world's cotton crop.”

Complicating the supply issue is decreasing demand worldwide. Demand outside the United States shows signs of losing more ground to manmade fibers. Adams said in 1984 cotton enjoyed a significant advantage over polyester globally with 84 million bales of cotton versus 59 million for synthetic fibers. “In 2003, the balance shifted and for 2004 cotton demand should reach 100 million bales versus 108 million bales for polyester. “That's a concern and limits growth potential for cotton.”

In the United States, cotton continues to increase its market share over synthetics. “That's a result of promotion and advertising,” Adams said.

But overall cotton consumption is in decline this year. Adams said through May, U.S. retail consumption of cotton products was roughly 500,000 bales below the same time last year.

“Imports of cotton textile products are roughly the same as last year. Exports are slightly higher and mill use is lower,” Adams said.

Total U.S. retail consumption for the year is estimated at 20.6 million bales, down from 21.2 in 2003. Imports are estimated at 19.5 million bales. Major importers include NAFTA and Caribbean Basin countries, from where imports have declined to 27 percent for 2004 to date. China accounts for 15 percent of imports with Pakistan at 13 percent.

“China's share has doubled since their entry into the WTO,” Adams said. “I expect these recent trends to grow with elimination of quotas.”

U.S. mill use continues to decline. Expected use for 2004 is 5.9 million bales, down from 6.3 million in 2003, which was 1 million bales less than the previous year. “That decline has been consistent for the last five years or longer,” Adams said. He said mill use could fall as low as 5.7 million bales.

China mill use growth rate has grown from about 20 percent in 1998 to 34 percent for 2004, “as U.S. and European union use declines. The U.S. export figure and the Chinese import figure produce a near mirror image,” Adams said.

The U.S. raw cotton export market has grown, hitting a record 13.8 million bales for the 2003 marketing year. China topped the buyer list with 5 million bales, followed by Mexico, normally the biggest U.S. customer, at 1.8 million bales. A foreign production gap contributed to the record U.S. export numbers. Estimates for 2004 export fall below that record, likely 12 million bales for the 2004/05 marketing year. That figure should hold “if we see a rebuilding of stocks in other countries,” Adams said. “If not, this could be optimistic and we could see potential for exports in the 10.5-million to 11-million bale range.”

Adams said lack of the Step 2 program, currently not in effect, also could hurt U.S. cotton export potential.

“Estimated world trade likely will decline in 2004,” Adams said, “and from 65 percent to 70 percent of the U.S. crop will be available for export as raw fiber. It will be more difficult to export that much raw fiber if we see a 105 to 106-million-bale crop. That big a crop poses a significant challenge for U.S. exports.”

That much cotton will stimulate recovery of stocks by the end of the marketing year. World ending stocks would be just under 40 million bales, 6 million above 2003, if the current USDA crop estimate holds.

Downward pressure on price is likely as well. Since last fall, the A Index fell by 30 cents a pound. “The A Index recently traded in the low to mid 50s, followed by some recovery. But as more stocks build we anticipate a more bearish picture than we did in 2003,” Adams said.

He said the counter-cyclical payment in 2003 likely will average 3.2 cents a pound when the final payment is made in October.

“Cotton prices this year will be below the loan rate and farmers can expect the maximum counter cyclical payment, 13.73 cents, unless a significant surprise with production occurs before harvest. But there is still a long way to go before the crop is out of the field.”

e-mail: rsmith@primediabusiness.com