National Cotton Council economists say cotton's 2013 outlook will be influenced by China's policy decisions and continued competition from man-made fiber (MMF).
Gary Adams, the NCC's vice-president Economics & Policy Analysis, told delegates at the NCC's 75th Annual Meeting in Memphis that recent data on fiber market share clearly demonstrates the many challenges in terms of competition from MMF that the cotton industry faces in 2013.
According to Adams, "Measured on the basis of pounds of cotton fiber, the 2012 U.S. retail cotton market fell to the lowest level since 1996, amid a 4th consecutive year of declining market share." Calendar 2012 retail cotton consumption is estimated to be the equivalent of 17.0 million bales of fiber.
In part, the loss in market share is the result of cotton prices that have been uncompetitive with polyester.
As raw fiber prices have moderated in recent months, cotton textile products also have become more competitive with manmade fiber products. Assuming these relative prices continue at levels comparable to current values, market share is projected to stabilize, leading to a modest growth in cotton net domestic consumption for 2013.
"However, cotton is unlikely to reclaim market share unless cotton prices trade at levels below polyester," Adams said.
The NCC sees 2013 world mill use of 108.7 million bales, an increase of 2.5 percent from 2012.More specifically, international mill demand outside of China is estimated to increase by 5.7 percent for the 2013 crop year, with more than half of the growth being accounted for by India and Pakistan.
"This demonstrates that a shift is under way in terms of where cotton is spun into yarn,"Adams said.
Continued growth in mill use is being supported by the relatively stable price pattern of recent months, more competitive prices when compared to polyester, and more favorable spreads between yarn values and fiber prices.
China's current policy is another factor lending support to mill use in other countries. By purchasing their domestic production at prices 40 to 50 cents above world prices, China is insuring that their internal prices are well above world prices, and causing their cotton spinning to be uncompetitive.
For China, differentials between yarn values and fiber prices are only one-third of those in India and Pakistan. Fabric manufacturers in China are increasingly looking to fill their yarn demand with imported product.
Acts as textile mill tax
China's current policy, while supporting prices received by farmers, acts as a tax on textile mills and has furthered the shift to manmade fiber. Over the 2009 through 2012 marketing years, mill use in China declined by almost 15 million bales. Over that same period, China's use of man-made fiber grew by 40 million bales, dropping cotton's market share from 30 percent to 19 percent.
Continuing to operate the program in a manner similar to the past year will maintain pressure on China's cotton spinning mills. As a result, China's mill use for the 2013 marketing year is expected to decline further, falling to 34.3 million bales.
With the support price well above world market prices, the vast majority of China's domestic production will enter government reserves.
According to Adams, "Both in the current marketing year and the year to come, the most important unknown is the extent to which China releases cotton from the reserves."
In the current marketing year, the government has commenced sales from the reserves. For the 2013 marketing year, China's decision regarding sales from the reserves and the allocation of import quotas/licenses is the key uncertainty.
Should they choose to be a more active seller in the coming year, China's imports could fall to the required World Trade Organization (WTO) quota of 4.1 million bales. However, China could also go to the other extreme and choose to sell very little of their reserves. Under that scenario, imports could increase to levels comparable to the current marketing year.
According to Adams, "Such an outcome is more bullish for U.S. exports in the short term, but the scenario only delays the inevitable outcome of working the cotton reserves back onto the market."
"The coming year is shaping up to be a challenging year where uncertainties regarding the market are magnified by the 40-million bale gorilla that is China's government reserves," Adams said.
After consecutive declines, cotton demand has stabilized and is expected to grow in the coming year. However, the battle for market share with man-made fibers has never been fiercer. With a recovering global economy, there is excellent potential for growth in cotton demand. However, that full potential will not be realized as long as China continues to operate their current policy in a manner that stifles cotton demand.
NCC economists assume for 2013 that China will continue to build government reserves, holding 38.8 million bales on July 31, 2014.
In order to supply projected mill use of 34.3 million bales, China would import 6.8 million bales, which includes the WTO-required quota of 4.1 million bales. Under this scenario, total imports for the 2013 marketing year are slightly more than half the import level for the current marketing year.
Reduced imports by China are only partially offset by increased imports in other countries, leading to a decline in world trade from 38.9 million bales to 36.0 million bales. With a reduction in exportable supplies, the United States is projected to see a decline in exports for the 2013 marketing year, down 1.6 million to 10.6 million bales.
When combined with mill use of 3.5 million bales, total use of 14.1 million bales exceeds the U.S. crop by 1.2 million bales. Ending stocks for the 2013 marketing year fall to 3.6 million bales, giving a stocks-to-use ratio of 25%.
Outside of China, mill use is expected to increase in 2013 while production is expected to decrease. The relative balance between production and use causes world stocks outside of China to decrease by 4.4 percent to 39.3 million bales by the end of the 2013 marketing year.
Additional details of the 2013 Cotton Economic Outlook are on the NCC's website at http://www.cotton.org/econ/reports/annual-outlook.cfm.