ICAC Forecasts Higher World Prices in 2008

By Drew Harris
dharris@meistermedia.com

What's the global outlook for cotton in 2007/08? With production projected slightly down and consumption forecast to increase by 3%, a significant decline in stocks-to-mill use ratio could mean higher cotton prices in the coming year. That's what International Cotton Advisory Committee (ICAC) economist Alejandro Plastina said in October during the ICAC's 66th Plenary Meeting in Izmir, Turkey. The following excerpts are from Plastina's report given at the yearly conference.

On Production
Despite the small gain in prices in 2006/07, cotton area is estimated slightly down in 2007/08 to 84 million acres. Area is estimated up in Asia, including in particular India (+4%) and Pakistan (+6%). However, it declined sharply in the United States (-17%), Turkey (-11%), and the CFA zone (-26%). In the United States and in Turkey, corn was a more attractive alternative to cotton at planting time. In addition, Turkish growers experienced low cotton yields in 2006/07, which discouraged some of them from planting cotton this season. In the African Franc Zone, several seasons of low producers' prices combined with declining yields have reduced the incentive for many farmers to plant cotton.

Production is expected to decline in many countries in 2007/08. In particular, significant production declines are expected in the United States (-16%), in Turkey (-9%) and in the African Franc Zone (-21%) due mainly to drops in cotton area. However, production in Asia is expected to increase again in 2007/08 to a record of 15.5 million tons. This would represent 59% of projected world production, compared to 56% in 2006/07 and 51% in 2005/06. Projected area and yield increases in India and Pakistan explain most of the forecast production increase in Asia in 2007/08.

On Consumption
World textile fiber consumption is driven by three major factors: income, population and fiber prices. It is also affected by trade rules and consumer preferences. Global cotton mill use is expected to continue to increase in 2007/08, supported by economic and population growth, but the increase is expected to be smaller than in recent seasons, owing in part to the expected increase in cotton prices. World cotton mill use is projected to increase by 3% to 27.2 million tons in 2007/08, compared to an annual growth of 6% in 2006/07 and 9% in 2004/05. Asian cotton mill use is expected to continue to increase by 5% in 2007/08 to a record of 20.5 million tons. This would represent 75% of world cotton mill use, up from 74% in 2006/07 and 57% in 1998/99. Once again, most of this increase will be driven by China (Mainland), where mill use is forecast at 11.1 million tons, up 6% from 2006/07 and accounting for 41% of world cotton mill use. Mill consumption of cotton is also expected to increase in India to 4.3 million tons (+8%) and in Pakistan to 2.7 million tons (+3%). Mill use in other Asian countries is forecast stable at 2.4 million tons: increases forecast in Bangladesh, Vietnam and Indonesia are expected to offset projected declines elsewhere.

Cotton mill use is expected to increase in Central Asia, Turkey and South America but to continue declining in the United States and the E.U. The end of the safeguard mechanisms against Chinese imports in the E.U. at the end of 2007 could accelerate the decline in European mill use.

On Price
As of October 16, the new ICAC price model predicts a season-average Cotlook A Index of 68 cents per pound for 2007/08, with a 95% confidence interval ranging from 61-76 cents per pound. The main reason for this projected price increase from 59 cents per pound in 2006/07 is the expected decline in the stocks-to-mill use ratio in the World-less-China (Mainland) from 59% in 2006/07 to 51% in 2007/08. This would be the lowest ratio since 2003/04, but the ratio would remain higher than the 25-year average of 45%. Cotton prices are rising, but not as fast as prices for corn, soybean and wheat. Increasing demand for ethanol pushed corn prices upwards in the past year; prices of soybean, a major competing crop, were affected by the decrease in supply and higher demand. Wheat prices are also increasing this season due to production shortfalls. As a result, in coming months cotton prices are expected to remain less attractive than prices of corn, soybean and wheat. This suggests that despite the expected significant rise in cotton prices this season, the Secretariat currently projects world cotton area to increase by only 1% in 2008/09. In particular, cotton area is expected to decline further in the United States.