NCC: Another Challenging Year for U.S. Cotton
February 8, 2016 Low cotton prices, ample global stocks and uncertainties about global mill cotton use will make 2016 another challenging year for the U.S. cotton industry.
Dr. Jody Campiche, National Cotton Council vice president, Economics & Policy Analysis, told delegates at the NCC Annual Meeting in Dallas, TX, that, “While world mill use is expected to exceed world production in 2016, global cotton stocks remain at high levels.”
Regarding domestic cotton mill use, USDA estimates U.S. mill use at 3.6 million bales, up 25,000 bales from 2014 and marking the fourth consecutive year of increased consumption. The Economic Adjustment Assistance Program (EAAP) continues to be an important source of stability, allowing mills to invest in new facilities and equipment. But the strength of the U.S. dollar is creating challenges for yarn exports.
She said export markets continue to be the primary outlet for U.S. raw fiber.
In recent years, U.S. export customers have changed. China is importing less raw cotton fiber, leading to a reduction in world trade. Although U.S. exports to China have been declining since 2012, drastic reductions have occurred in the 2015 marketing year. As a result, the NCC estimates 2015 U.S. exports at 9.5 million bales, down 15.5 percent from 2014 and below the most recent USDA estimate.
The current estimate may prove to be a bit optimistic, as the weekly pace will need to increase throughout the remainder of the marketing year to reach 9.5 million bales.
Campiche said that, considering the massive stockpiles of cotton and expectations for limited quota, China’s imports are expected to fall further in 2016 to 4.75 million bales, down from 5.5 million in 2015.
China’s mill use is also projected to decline in 2016. Campiche noted that although China’s internal cotton price has declined in the past year, it is still almost twice the level of polyester prices, as those prices also have weakened – a relationship that is not allowing cotton mill use in China to recover.
India is projected to continue as the world’s largest cotton producer and the second largest exporter in 2016. Indian cotton producers continue to receive support through fertilizer subsidies and the Minimum Support Price (MSP) program. In addition, India will begin a pilot program in 2016 that could eventually replace the current MSP with a direct farmer subsidy program.
Campiche projects U.S. offtake of 13.8 million bales in 2016, leading to an increase in ending stocks of 193,000 bales. Although world cotton stocks are projected to decline by 6.3 million bales in 2016, the reduction is not large enough to significantly reduce global inventories that begin the year at 103 million bales.
While projections of global consumption exceeding production normally would be supportive of prices, the implications for the coming year may not be as clear cut. The majority of the decline in global stocks is due to reduced inventories in China. An aggressive approach by China to reduce stocks would have bearish implications for world prices, particularly if the increased availability of reserve cotton reduced China’s demand for imported cotton yarn.
In her analysis of the NCC Annual Planting Intentions survey results, Campiche said the NCC projects 2016 U.S. cotton acreage to be 9.1 million acres, about 6.2 percent more than 2015. Although the survey results suggest a slight increase in acreage, the modest increase in cotton acreage is largely the result of weaker prices of competing crops and improved expectations for water and favorable planting-time weather.
Comments from survey respondents underscored the very difficult financial conditions facing cotton producers. For the past two years, U.S. producers have struggled with low cotton prices and high production costs. With current futures markets indicating steady prices, producers’ economic situation is not likely to improve in 2016, and some may find it difficult to obtain production financing for the current year.
Additional details of the 2016 Cotton Economic Outlook are available online.
Source – National Cotton Council
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