U.S. cotton producers are into their third year of “no good economic news,” with a deepening crisis in the textile industry and the continuing erosion of prices. But the news isn't all bad, says Mark Lange, vice president of policy analysis for the National Cotton Council.
“There are a few good things out there,” said Lange at the recent Southeast Cotton Conference. The conference, held in Raleigh, N.C., is sponsored by Southeast Farm Press. “One of these good things is that the Federal Reserve has been very aggressive in reducing interest rates. In reducing interest rates, the Fed is reducing the cost of doing business for you, as well as your customers. That's a good thing.”
Another “good thing,” he says, is that inflation in the United States continues to be low. “The Federal Reserve can, if it chooses to, press these interest rates even lower on a short-term basis. They've probably reached their limit, however, because we're looking at short-term rates that now are just about at the rate of inflation,” says the economist.
There's mixed news about the markets, says Lange, but people are beginning to forecast that GDP growth worldwide and in the United States will be better in 2002 and 2003 than in 2001.
“Most people say this up-tick in economic activity will be observable by the middle of this year, and that an economic recovery is in place in the United States and a good part of the remainder of the world,” says Lange.
But the strength of the dollar, he adds, continues to reflect negatively on agriculture and the textile industry. U.S.D.A. exchange rate data shows that for agriculture, the strength of the dollar has increased by more than 30 percent since 1995, he says, with most of the increase occurring in the past two years.
Similar data for the textile industry shows that the strength of the dollar has increased by 55 percent against Asian currencies.
“This increase in the strength of the dollar has had a dramatic effect on worldwide cotton prices. Cotton is a dollar-denominated, dollar-traded commodity in the world, and it's pressing down world prices,” notes Lange.
U.S.D.A. statistics show a “huge” world cotton crop for the 2001-2002 crop year, he says, and it's much larger than offtake. “The worldwide crop is pushing 97 million bales, with offtake below 92 million bales. We're also seeing a big increase in stocks, up to 44.1 million bales. We've seen stagnation in the worldwide mill use of cotton, despite the lowest prices in 30 to 40 years. Slowing world economies just can't generate enough demand.”
Turning to production, both China and the United States had good years this past growing season, says Lange. “This is a record world crop. And, in the last year, we've seen stock-building outside of China. The Chinese don't have problems holding stocks. They've managed relatively large stocks.
“The remainder of the world doesn't like to hold stocks, and this has implications for prices into next year and beyond. Marketing conditions are forcing some countries to hold cotton stocks. These are cotton-exporting countries, and they don't like to hold their stocks.”
China was a large-scale cotton importer in the early to mid-1990s, says Lange. In the past couple of years, China has been a net exporter.
“This year, they'll import and export some cotton. Most people expect China to be some sort of a cotton market savior this year. Domestic prices of cotton in China are higher than world prices. So, there obviously would be an incentive for Chinese mills with access to world cotton to buy cotton off the world market. The Chinese eventually will have to meet their WTO contract or they'll be subject to restrictive quotas on textile products coming into the United States.”
The U.S. retail market for cotton is very good, says Lange. The United States, he adds, is the world's largest market for cotton, consuming more than 20 million bales per year and accounting for almost one-fourth of the cotton consumed in the world.
“The unfortunate part is that we're sourcing from importers. Some imports actually are U.S. cotton coming back to us. Some of those imports are cotton that went to Mexico as raw cotton or fabric and came back to the United States.”
Only about a 3-million bale equivalent in the United States goes from “dirt to shirt,” says Lange. This is cotton, he says, that goes from the field to the actual product on the shelf, and it never leaves the United States.
Trade policies and agreements, he says, have changed how U.S. textile firms manufacture their products. “Despite being able to increase exports overall, cheap foreign products - with the strength of the dollar - continue to burden U.S. textile manufacturers.”
Turning to the U.S. cotton crop, Lange says mill use is estimated at 7.7 to 7.8 million bales for the 2001-2002 crop year. U.S.D.A. also is forecasting a record year in exports.
Normally, says the economist, U.S. cotton sells at a three- to four-cent premium over the world price. Today, however, U.S. cotton sells at about a cent and a half over the world price.
The U.S.D.A., he says, is estimating a U.S.-record cotton crop exceeding 20 million bales for the 2001-2002 crop year. “This number probably will push up to 20.2 million bales by the time the ginning season is completed. We're looking at 7.7 million bales in use and 9.8 million bales in exports. Ending stocks are forecast at 8.6 million bales.
“Those are huge ending stocks, and an indication of where prices will be for some time to come. Looking at offtake, we're seeing 40 percent of our cotton going into textile mills and 60 percent going into the export market. The export market is far more volatile. This implies a much greater volatility during the course of the crop year in the price of cotton.”
Lange predicts that cotton plantings in 2002 will drop back to 2000 levels. “We'll lose close to 1 million acres from the Mid-South, due to changes in crop insurance. The huge acreage increase in 2001 was the result of a lucrative crop insurance plan for the Mid-South, and that isn't there this year.”