All the hard work of cotton market economists often comes down to one question when it comes to price projections. “Is China buying?”
Of course, knowing China's production and consumption figures would also help analysts project prices. It's just that the figures are not always reliable and tend to gum up the works.
So economists figure stocks everywhere else in the world except China, then see if China's buying. While nothing's perfect, it seems to have some validity.
“There is a fairly good, negative relationship between the world stocks-to-use ratio (minus China) and world cotton prices from 1991 to 2003,” said Gary Adams, the National Cotton Council's vice president for economics and policy analysis. He spoke at a briefing for Delta Council scholarship recipients at the Beltwide Cotton Conferences.
As for China, “We really know what China's internal situation is by whether they're buying cotton or exporting cotton.”
China's buying as of late has pushed prices higher, although those prices have fluctuated significantly, noted Adams. Underlying the higher prices has been the whittling down of world cotton stocks, once very burdensome, over the last four to five years.
In 2002, the world started with 47 million bales of cotton and a stocks-to-use ratio of almost 50 percent. The textile world has now had two years in a row where production has fallen short of consumption, and world carryover has dropped to 32 million bales.
“The same situation is happening in the United States,” Adams said. “We had a huge crop in 2001, more than 20 million bales, and were in the 17 million to 18-million-bale range in 2002-03.
“We were fortunate to see offtake in the 19-million-bale range, with our export numbers going to the 13-million-bale range. This allowed the stocks-to-use ratio to drop down to what we think will be around 22 percent. That has led to better prices.”
There is a downside to China's consumption, however. The United States is still the largest retail market for textile apparel products, with a market currently of the equivalent of a little over 21 million bales. However, only about 3 million bales of U.S. cotton is grown and made into apparel in the United States, “from dirt to shirt,” noted Adams.
Meanwhile, the United States imports around 18 million bales (equivalents) of textile apparel products annually, or about 1.5 million bales per month. “That's what our domestic textile mills are battling,” Adams said.
One factor impacting increased textile imports into the United States is the four-stage process of eliminating quotas on textile apparel product imports. “Stage Three began Jan. 1, 2002 and now we're less than a year away from all the quotas going away,” Adams said. “At that point, all we will have will be the tariffs.
“We could see a greater increase in the number of textile imports,” Adams said. “How much this hurts the domestic industry depends on whether or not we see our retail market continue to expand.”
Safeguards are in place to limit the growth of Chinese textile imports, noted Adams. “When China entered the WTO, they agreed that if the growth of their imports disrupted our domestic industry, we could put measures into place. In late 2002, textile interests started pushing these safeguards on four products and three of the products were accepted.”
The safeguards stipulate that imports of a particular product from China cannot be 7.5 percent above what they were the year before.
“But the growth of imports from China is just going to be a fact,” Adams said. “Keep in mind that China is the largest consumer of raw cotton in the world, and they're where a lot of new investment in spinning is going. So they're setting themselves up on a path to be a dominant player in the world textile market.”
The best that could happen to the U.S. textile industry is to stabilize its decline, according to Adams. “It's not realistic to say we are going to turn this back around and go from 6 million bales of domestic consumption back up to 11 million bales.”
Another side to the equation is whether or not China can and will expand its production of raw cotton to meet its own needs. “They're only going to produce about 22 million bales this year, partly due to poor yields. For them to get to 27 million to 30 million bales will require them to add area and have some good yields.”
On the other hand, “they're already at 30 million bales of consumption and it's going to be hard for them to keep up with that. And a couple of years down the road, they may be at 32 million or 33 million bales of consumption.”
Another factor buoying cotton prices is the fact that foreign cotton consumption and use (outside the United States) has run above foreign production for several years, “which has created a hole for U.S. cotton,” even though the gap between foreign consumption and production has narrowed.
China has been a huge buyer of U.S. cotton, having bought a little over 3 million bales over the current crop year. Meanwhile, Mexico has been a solid customer at around 2 million bales.