Cotton and Wool. Situation and Outlook Yearbook ERS. U.S. fiber demand contracts in United States Department of Agriculture

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1 United States Department of Agriculture ERS Economic Research Service Cotton and Wool Situation and Outlook Yearbook CWS-2001 November 2001 U.S. fiber demand contracts in 2001 Lb per capita Total fiber demand Cotton fiber demand Total fiber demand includes cotton, wool and manmade. Source: Economic Research Service, USDA. Cotton mill demand

2 Cotton and Wool Situation and Outlook Yearbook. Market and Trade Economics Division, Economic Research Service, U.S. Department of Agriculture, November 2001, CWS-2001 Contents Summary U.S. Cotton Situation and Outlook World Cotton Situation and Outlook Situation and Outlook for Other Fibers Special Articles: Regional Shifts in China s Cotton Production and Use The Agreement on Textiles and Clothing: Impact on U.S. Cotton List of Tables Report Coordinator Leslie Meyer (202) Fax (202) LMEYER@ers.usda.gov Other Contributors Stephen MacDonald (202) Robert Skinner (202) Mae Dean Johnson (202) (Statistics) Editor Lou King Layout and Design Wynnice Pointer-Napper Approved by the World Agricultural Outlook Board. Summary released November 27, Summaries and full text of Situation and Outlook reports may be accessed electronically via the ERS website at To order, call in the United States or Canada. Other areas please call (703) Or write ERS-NASS, 5285 Port Royal Road, Springfield, VA The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact USDA s TARGET Center at (202) (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC or call (202) (voice and TDD). USDA is an equal opportunity provider and employer. 2 n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

3 Summary U.S. cotton production in 2001 is forecast at a record 20.2 million bales, 3 million bales or 17 percent above last season s cotton crop. This season s output is based on larger area and a higher national yield. U.S. cotton planted area jumped almost 700,000 acres from 2000 to 16.2 million this season, the second largest area planted to cotton in four decades. While drought conditions this season raised abandonment and limited production in parts of the Southwest, conditions in other parts of the Cotton Belt were above average. Nationally, abandonment reached 13 percent this year, compared with 16 percent in Harvested cotton area is estimated at 14.1 million acres, 1 million above last season and the highest since The national yield is projected at 685 pounds per harvested acre, well above last season and the highest in 5 years. U.S. cotton exports in 2001/02 (August/July marketing year) are projected to jump dramatically, rising nearly 40 percent from last season to 9.4 million bales. Large U.S. supplies of exportable cotton coupled with the strong sales and shipments to date are expected to push exports to match the recent high achieved in 1994/95. As of early November, U.S. cotton export commitments totaled 7.7 million bales, or 82 percent of the shipment target. With U.S. exports expanding and prospects for world trade rising modestly in 2001/02, the U.S. share of global trade is expected to reach 33 percent, well above last season s 26 percent and near the 1994/95 level. In contrast, U.S. cotton mill consumption is forecast to reach only 8.1 million bales in 2001/02, 9 percent or nearly 800,000 bales below last season. The continued growth of U.S. cotton textile and apparel imports, along with the slowdown in the U.S. economy, has kept tremendous pressure on the U.S. spinning industry and has forced major restructuring in the U.S. textile and apparel industry over the last several years. U.S. cotton stocks at the beginning of 2001/02 were estimated at 6 million bales. With the record crop forecast this season, total U.S. cotton supply in 2001/02 is projected at 26.2 million bales, or 24 percent above a year ago. Meanwhile, U.S. cotton demand is forecast to expand to 17.5 million bales, nearly 2 million above 2000/01. However, based on these supply and demand estimates, U.S. ending stocks for 2001/02 are estimated to climb significantly to 8.7 million bales, the highest since 1985/86. As a result, the U.S. stocks-to-use ratio is expected to climb to 50 percent in 2001/02. World cotton consumption in 2001/02 is forecast at 91.6 million bales, about 200,000 bales below a year earlier as world economic growth drops to its slowest in nearly a decade. However, foreign mill use is expected to rise to its third consecutive record-high while the United States is forecast to undergo the largest decline in mill use of any country. The largest gains are expected in Turkey, Uzbekistan, Pakistan, and Thailand. In contrast with stagnant consumption, world cotton production in 2001/02 is forecast at a record 96.9 million bales, 8.5 million bales above last season. Production is estimated higher across much of the Northern Hemisphere, with by far the largest increases expected in China (3.2 million bales higher) and the United States (3 million). Increased plantings and improved weather are also expected to lead to substantially larger crops in India, Central Asia, and West Africa s Franc Zone. Foreign production is forecast to be its second highest ever, 76.7 million bales, with only a few countries, particularly Brazil and Australia, expected to harvest lower crops than the year before. World cotton exports are expected to increase 7 percent in 2001/02, to 28.1 million bales, their highest since 1994/95. However, foreign exports are expected to fall 5 percent to 18.7 million bales, their lowest since 1983/84. Australia s exports are expected to be almost 800,000 bales lower than the year before in 2001/02, and smaller declines are expected from Central Asia and South America. With rising world production and stagnant consumption, stocks are projected to rise this season to 44.4 million bales, their highest in 3 years. The 5.5-million-bale stock increase is expected to be split evenly between the United States and the rest of the world, with India accounting for the largest increase outside the United States. Little change is foreseen in China s ending stocks in 2001/02, in sharp contrast to the last 2 years when stocks there fell by 6.2 million bales in 1999/00 and by 3.4 million in 2000/01. Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 3

4 U.S. Cotton Situation and Outlook U.S. Cotton Review, 2000/01 The 2000/01 (August/July) marketing year began with U.S. cotton stocks estimated at 3.9 million bales, similar to the previous three seasons. The 2000 cotton crop was the fifth planted under the Federal Agriculture Improvement and Reform (FAIR) Act, which provides total planting flexibility to producers. In 2000, this flexibility facilitated the planting of additional acreage to cotton as relative net returns at planting time, the marketing loan program, and the insurance program seemed to favor cotton over competing crops. The U.S. cotton area in 2000 increased to 15.5 million acres, 4 percent above the 14.9 million planted in However, the national abandonment rate jumped from near 10 percent in 1999 to 16 percent in 2000, the result of drought conditions in Texas where 75 percent of the lost acreage occurred. Consequently, total cotton harvested area was only 13.1 million acres, slightly below that of the previous year. With fewer harvested acres, the U.S. yield averaged 632 pounds per harvested acre, the highest in 3 years. With the higher yield more than offsetting the lower harvested area, U.S cotton production totaled nearly 17.2 million bales, slightly higher than the crop produced in In 2000/01, total U.S. cotton demand slipped to 15.6 million bales, a 1.3-million-bale reduction. While U.S. raw cotton exports remained stable, U.S. mill use continued a third year of decline. In 2000/01 U.S. cotton exports reached 6.8 million bales, slightly above the previous 5-year average. Despite an increase in foreign cotton production, higher foreign mill use helped sustain U.S. exports. With world trade contracting to 26.4 million bales in 2000/01, the U.S. share of global trade increased one percentage point to nearly 26 percent. U.S. cotton mill consumption in 2000/01 dropped to 8.9 million bales from 10.2 million the year before, a 13-percent reduction. In addition, the 2000/01 mill use was the first in a decade to fall below 9 million bales. The decline has resulted from competition from cotton textile and apparel imports that has provided U.S. consumers with relatively inexpensive products. The situation was exacerbated by the strength of the U.S. dollar, providing a home for foreign goods in the United States while hindering U.S. cotton textile exports to the world. During the 2000/01 marketing year, U.S. textile and apparel manufacturers were forced to reduce their output dramatically, resulting in a record number of industry employees affected by plant layoffs and closings. With U.S. cotton supply at 21.1 million bales in 2000/01 and total demand at only 15.6 million, stocks at the end of last season jumped significantly. Ending stocks were placed at 6 million bales, a gain of more than 2 million bales during the season. As a result, a stocks-to-use ratio of more than 38 percent was the highest since 1988/89. Despite a reduction in demand and an increase in stocks, the average upland price received by producers improved from 45 cents per pound in 1999/2000 to 50 cents. Although farm prices had improved, upland producer returns in 2000/01 were lower as the cotton program provided a loan deficiency payment averaging only 4 cents per pound, compared with 20 cents in 1999/2000. Similarly, the extra-long staple (ELS) price rebounded from 1999/2000 s 85 cents per pound to average $1.00 in 2000/01. Supply Outlook for 2001/02 As planting time for the 2001 crop approached, U.S. cotton prices had fallen but alternative crops like corn and soybeans moved lower as well and were not attractive enough to pull area away from cotton. Also, the cotton marketing loan program and the insurance program for cotton provided incentives for U.S. producers to plant additional acreage to cotton in Favorable springtime weather allowed producers to plant 16.2 million acres of cotton this season, 4 percent higher than in 2000 and the second largest in nearly four decades (table A). Table A--U.S. cotton supply and use, 1999/ /02 1/ 1999/ / /02 Million acres Area planted Area harvested Pounds/acre Yield Million bales Beginning stocks Production Imports Total supply Mill use Exports Total use Ending stocks Percent Stocks-to-use ratio / November 2001 estimates. Marketing year beginning August 1. Source: USDA, World Agricultural Outlook Board. 4 n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

5 Upland cotton acreage this season is estimated at 16 million acres, compared with 15.3 million in Similarly, ELS cotton area climbed to 235,000 acres in 2001, 65,000 acres above a year earlier. The rise in ELS acreage came in California, where some area moved out of upland production as prospects for ELS looked more favorable in With the increase in cotton planted area this season, harvested area rose about 1 million acres from 2000 to 14.1 million. Although the abandonment rate based on November estimates of 13 percent 2 million acres was below last season s 16 percent, the loss remains above average. Despite this, U.S. cotton harvested area is the second highest since 1963/64. After a favorable start to the growing season and cotton crop conditions more favorable than last year, this summer s drought across the Southwest region lowered overall conditions during the growing season and limited the potential of the cotton crop there. Based on November 1st conditions, the 2001 U.S. cotton crop was estimated at nearly 20.2 million bales, 3 million bales or 17 percent above last season and the largest crop on record. Compared with 2000, this season s larger crop was aided not only by increased harvested area but also a higher yield. The U.S. average cotton yield is currently projected at 685 pounds per harvested acre, 53 pounds above last season and the highest in 5 years (fig. 1). Upland production is projected at a record 19.6 million bales in 2001, with an average yield forecast at 675 pounds per harvested acre. On a regional basis, forecast production is larger in three of the four Cotton Belt regions this season. In the Delta, upland output is projected at 6.8 million bales, Figure 1 U.S. cotton production and yield Mil. bales Yield (right axis) Production 2001 estimated. Source: National Agricultural Statistics Service, USDA. Pounds/acre Crop year the highest since 1994/95 s record of 6.9 million. In the Southeast, production is forecast at 5.3 million bales, the first 5-million-plus season there since 1937/38. Drought conditions in the Southwest have limited upland output expectations to near the 5-year average of 4.6 million bales. In the West, the upland crop is estimated at 2.8 million bales this season. Despite excellent growing conditions in 2001, higher yields could not offset the acreage shift from upland to ELS and as a result, upland production declined from a year ago. ELS production is forecast at 618,000 bales in 2001, nearly 60 percent above the 2000 crop. Larger area and a record yield provided the jump in output this season as ELS cotton provided a better alternative to some producers in the West region. The national ELS yield is projected at 1,233 pounds per harvested acre. California continues to dominate ELS production, accounting for about 90 percent of the area and output. U.S. cotton stocks on August 1, 2001 were estimated at 6 million bales, well above the 3.9 million seen during the previous three seasons and the largest beginning stocks since 1989/90. Like 2000/01, only a small volume of raw cotton imports is expected to enter the United States this season, as the record production and decline in mill use limits the need for foreign supplies. As a result, total U.S. cotton supply in 2001/02 is projected at 26.2 million bales, 5.1 million above last season and the largest since 1966/67. Demand Outlook for 2001/02 The U.S. cotton demand outlook for 2001/02 is projected to improve modestly from a year earlier. This season s total use is forecast at 17.5 million bales, nearly 12 percent above 2000/01, with a jump in exports offsetting a decline in mill use. U.S. cotton exports are forecast to rise nearly 40 percent from last season to 9.4 million bales. Large U.S. supplies of exportable cotton coupled with the strong sales to date are expected to push shipments to match the recent high achieved in 1994/95. And, despite stagnant global demand, the U.S. program has kept U.S. cotton competitive around the world. While world cotton prices decreased significantly in 2001 falling about 30 cents per pound between December 2000 and October 2001 U.S. cotton prices declined a similar amount (table B). This movement allowed U.S. sales to continue to build this fall. Upland cotton shipments are projected to surpass 8.9 million bales, while ELS exports are expected to reach 460,000 bales, both near their respective highs during the mid-1990s. With U.S. exports expanding dramatically and prospects for world trade rising modestly in 2001/02, the U.S. share of global trade is expected to reach 33 percent, well above last season s 26 percent and near the 1994/95 level (fig. 2). Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 5

6 Table B--World and U.S. cotton prices, August 2000 to present Northern Europe 1/ U.S. Adjusted A B spot world Month Index Index price 2/ price 3/ Cents/lb Aug NQ Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov / A= Northern Europe price for Middling, 1-3/32 inch cotton; B= Northern Europe coarse count price. Monthly prices are average of Thursday quotes. NQ=No quote. 2/ Monthly average spot price for SLM 1-1/16 inch cotton. 3/ Average of weekly prices. Sources: Cotton Outlook and USDA. Figure 2 U.S. cotton exports Mil. bales 12 Percent 35 2 million above the comparable period last season. However, ELS shipments and outstanding sales are a combined 30 percent below year-earlier levels. As of early November, ELS commitments were approximately 256,000 bales, or about 56 percent of the current export forecast. U.S. cotton mill consumption, on the other hand, is forecast to reach only 8.1 million bales in 2001/02, 9 percent or nearly 800,000 bales below last season. The current projection is more than 3 million bales below the recent high seen in 1997/98 as growth of U.S. cotton textile and apparel imports has continued to pressure the U.S. spinning industry along with the slowdown in the U.S. economy. As a result, major restructuring in the U.S. textile and apparel industry has occurred over the last several years, forcing many in the industry to limit output or close operations. The level and origin of these imports will help determine the amount of raw cotton consumed by U.S. mills. Upland mill use is forecast at 8 million bales in 2001/02, while ELS consumption is projected at 110,000 bales, both below a year ago. With mill use declining, its share of total demand is also reduced and stresses the importance of U.S. exports (fig. 3). Based on the first 3 months of data from the Department of Commerce, the seasonally adjusted annual rate of cotton consumption averaged only 7.8 million bales. Actual cotton mill use for August through October 2001 totaled 2.10 million bales, compared with 2.57 million a year earlier. Like cotton, manmade fiber mill use has fallen, but at a faster rate during the first three months of 2001/02. Consequently, cotton s share of fiber consumption on the cotton system has 10 8 Share of world trade (right axis) Figure 3 U.S. cotton mill use 6 20 Mil. bales 14 Percent Share of demand (right axis) Crop year 2001 estimated. Source: USDA Based on U.S. Export Sales data through early November, U.S. cotton export commitments (shipments plus outstanding sales) totaled 7.7 million 480-pound bales, significantly above the 4.2 million reported a year earlier. Upland cotton shipments to date have reached 2.5 million bales, compared with only 1.2 million in 2000/01. Likewise, upland outstanding sales are reported at 4.9 million bales, or more than Crop year 2001 estimated. Source: USDA and Bureau of the Census n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

7 risen from a year earlier to 81 percent, compared with a 2000/01 average of 78.5 percent. Based on these projections of U.S. cotton supply and demand, ending stocks for the 2001/02 marketing year are estimated to climb to 8.7 million bales, 45 percent above the beginning level and the highest stocks since 1985/86 when 9.3 million bales were held in the United States (fig. 4). And, despite the healthy demand increase expected this season, the record U.S. crop has more than offset the rise in demand and has pushed the U.S. stocks-to-use ratio from 38 percent in 2000/01 to 50 percent. Upland stocks are estimated at 8.5 million bales, while ELS stocks are projected to rise to 189,000 bales. U.S. Textile Trade and Domestic Consumption The overall volume of U.S. textile trade in calendar 2001 is expected to decline slightly (based on preliminary data) for the first time in over a decade. Although the liberalization of world textile and apparel trade continues, the sluggish U.S. economy in 2001 has kept both imports and exports from expanding significantly this year. However, the U.S. textile trade deficit will increase again in 2001, as imports remain stable and exports decline. In calendar 2000, the textile trade deficit for all fibers reached a record of 8.3 billion (rawfiber-equivalent) pounds, 12 percent above U.S. textile and apparel imports during the first 9 months of 2001 were nearly identical to the comparable period in 2000, at 10.3 billion pounds. However, textile exports through September 2001 have slipped below last year s 4 Figure 4 Cotton stocks and stocks-to-use ratio Mil. bales Stocks/use ratio (right axis) Percent billion pounds to 3.8 billion as the strength of the U.S. dollar makes exports more expensive to foreign customers. As a result, the textile trade deficit for all fibers during the first 9 months of 2001 approached 6.6 billion pounds, about 4 percent above the same period in For cotton, U.S. textile trade has followed a similar pattern so far in Cotton textile imports totaled 5.7 billion pounds through September 2001, equivalent to a year earlier. Meanwhile, cotton textile exports have slipped 9 percent from 2000 to approximately 1.7 billion pounds during the January through September period. For calendar 2001, cotton textile imports are expected to rise for the 13th consecutive year, while exports may fall for the first time in 17 years. Imports for the year will likely approach the equivalent of 16 million bales (7.6 billion pounds) of raw cotton, about 1 percent higher than in On the other hand, U.S. cotton textile exports are likely to slip below the 5-million-bale level (2.2 billion pounds), a decline of 8 percent from a year ago. With cotton textile exports decreasing and imports steady, the U.S. cotton textile trade deficit is expected to rise again in 2001 to the equivalent of 11.3 million bales of raw cotton (fig. 5). Meanwhile, imported textile and apparel products continue to displace U.S. fiber mill use. In 2001, total U.S. fiber mill use is expected to fall to approximately 15 billion pounds, the fourth consecutive annual decline and perhaps the lowest since While total U.S. manmade fiber mill use is expected to fall for the second year in a row in 2001, cotton mill use will decline for the fourth consecutive year to about 4 billion pounds, the lowest in a dozen years. With a reduction in cotton-rich apparel output in the United States, cot- Figure 5 U.S. cotton textile trade Mil. bale equivalents Exports Imports 2 Ending stocks Crop year 2001 estimated. Source: USDA Crop year 2001 estimated. Source: Economic Research Service, USDA. Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 7

8 ton s share of U.S. fiber mill use continues to erode and will likely decline to about 26.5 percent in 2001 while manmade fiber share climbs above 70 percent. In addition to U.S. mill use, 2001 total domestic consumption (mill use plus net textile trade) of cotton is expected to fall for the first time in 5 years as the slowdown in the U.S. economy persists. Based on data for the first 9 months of 2001, domestic consumption totaled 7.1 billion pounds, 6 percent below the comparable period in By year s end, cotton domestic consumption is likely to approach 9.4 billion pounds, the lowest since 1998 (fig. 6). Likewise, the U.S. per capita cotton consumption could fall about 2 percentage points from 2000 s 35.8 pounds. In addition, only about percent of this total is being produced in U.S. mills, compared with 65 percent just 5 years ago. Figure 6 U.S. cotton consumption Bil. lb Total Pounds 40 Per capita (right axis) Crop year estimated. Source: Economic Research Service, USDA. 8 n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

9 World Cotton Situation and Outlook Slowing World Economy, Favorable Weather, and Policies Hit World Price in 2001 A slowing world economy cut into cotton consumption during 2000/01, and also reduced prospects for consumption in 2001/02 just as cotton output around the world jumped in response to last year s relative prices and this year s improved weather (table C). China s long-standing efforts to reform its cotton sector, and its imminent accession to the WTO, resulted in subsidized auctions from government stockpiles during 2000/01. As the government auctions released more Table C--World cotton supply and use, 1999/ /02 1/ Consump- Ending Production Imports tion Exports stocks 1, lb bales World 1999/00 87,360 28,459 91,898 27,275 41, /01 88,405 26,727 91,792 26,397 38, /02 96,871 28,421 91,637 28,114 44,381 Foreign 1999/00 70,392 28,362 81,657 20,525 37, /01 71,217 26,712 82,910 19,634 32, /02 76,696 28,411 83,537 18,714 35,681 China 1999/00 17, ,200 1,692 14, /01 20, , , /02 23, , ,842 Pakistan 1999/00 8, , , /01 8, , , /02 8, , ,921 India 1999/00 12,180 1,600 13, , /01 10,900 1,550 13, , /02 12,200 1,700 13, ,463 EU 1999/00 2,628 4,002 4,860 1,517 1, /01 2,459 4,042 4,895 1,580 1, /02 2,376 4,062 4,875 1,430 1,433 Japan 1999/00 0 1,280 1, /01 0 1,138 1, /02 1,100 1, Korea 1999/00 1 1,524 1, /01 1 1,420 1, /02 1,350 1, Thailand 1999/ ,706 1, / ,575 1, / ,775 1, / November 2001 estimates. Source: USDA. than 6 million bales of cotton to China s mills and trading companies, the need for imports during 2000/01 diminished significantly. With the world s consumption falling, production rising, and yet another postponement of significant Chinese imports, the A-Index fell from a 64-cents/lb average during January 2001 to 37 cents/lb in October. Agricultural commodity prices were low in general as the 2001 U.S. harvest drew to a close, but cotton turned particularly weak compared with other major U.S. field crops. Compared with their average during the first half of the 1990s, U.S. Gulf port prices for wheat, corn, and soybeans during August-October of 2001 were down percent, about the same as the 2000/01 level. The A-Index, however, during the first 3 months of marketing year 2001/02, averaged 45 percent below its average. During marketing year 2000/01, the A-Index was only 23 percent below average. While the shift in relative prices against cotton suggests that in 2002/03 resources might shift toward producing other crops, it remains to be seen if an improving macroeconomic scenario will allow coinciding consumption gains to complete cotton s recovery. Clothing s income elasticity is greater than food s, indirectly making cotton more sensitive to economic volatility. World Consumption Stagnates During the 1990s, world cotton consumption grew 0.8 percent annually on average, down from 3.3 percent during the 1980s. In 2000/01, consumption shrank slightly, by onetenth of a percent, and is forecast to decline two-tenths of a percent in 2001/02. Cotton consumption is affected by changes in consumer taste and government policy as well as in world economic growth, but the recent economic slowdown has affected cotton significantly. According to the International Monetary Fund (IMF), world economic growth averaged 3.4 percent annually during the 1980s and 3.0 percent during the 1990s. However, cotton consumption rose 3 times as quickly during the 1980s than during the 1990s. World consumption during the 1980s was boosted by changes in taste and the shift of U.S. agricultural programs away from market price support. During the early 1990s, world consumption was depressed by the collapse of Russia s textile industry, an industry that relied on cotton to a far greater extent than the rest of the world. By the mid- 1990s, world cotton consumption had largely worked through these shifts, and embarked on a period of faster, albeit more volatile, average growth driven by an expanding world economy. The economic slowdown in 2001 followed a 7-year period of relatively strong economic growth. Excluding 1998, when the Asian financial crisis brought world Gross Domestic Product (GDP) growth down to 2.8 percent, GDP growth averaged 4 percent during During the decade Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 9

10 before 1994, the world economy expanded only 3.3 percent annually on average. However, for both 2001 and 2002, the IMF forecasts world GDP growth at 2.4 percent per year, and most other forecasts suggest a prospective slowdown at least as great. The geographic distribution of the current slowdown has also been unfavorable for sustaining cotton consumption. During the 1990s, the economic strength of the United States relative to the rest of the world was its highest in perhaps a generation. The analogy of the U.S. economy to a locomotive, pulling the rest of the world along, is well known with respect to overall economic growth, but it is particularly apt for cotton consumption. About 80 percent of the increase in world cotton consumption between 1995 and 1999 is attributable to increased purchases by U.S. consumers. In part, this represented a long-term trend where a long-standing consumer and technical promotion program unique to the United States has resulted in a growing preference for cotton. But, in part it was also fueled by an unusually strong U.S. economy, which began slowing in Mill Use Down Most in U.S. in 2000/01, Up Most in China In 2000/01, U.S. end-use of cotton declined for the first time since 1995/96 as U.S. GDP growth dropped from 4.1 percent in 2000 to 1.1 percent in U.S. end-use of cotton fell 3 percent to 19.9 million bales, a 600,000-bale decline. U.S. mills bore the brunt of this contraction, and U.S. mill use fell more than any other country in the world, 1.4 million bales. U.S. net imports of cotton products continued to rise in 2000/01, but only by 600,000 bales (fiber-equivalent), down substantially from the million-bale gains of the preceding 3 years. The European Union (EU) and Japan experienced similar shifts in GDP growth, with Japan actually contracting by 1.2 percent in These slowdowns reduced the opportunities for textile exporters in developing countries, and helped cut mill use in Japan and in some EU members as well. After the United States, the country with the next largest year-to-year decline in cotton consumption was Turkey, with a 600,000-bale drop to 5 million bales. In addition to difficulties exporting to a slowing EU market, Turkey experienced a financial crisis during 2001, and its GDP is estimated to have declined more than 8 percent. Mexico has a trading relationship with the United States comparable to that between Turkey and the EU, and Mexico s was the next largest decline in cotton use. Mexico s cotton use fell 300,000 bales from the year before in 2000/01, its first decline since 1992/93. Between 1992/93 and 1999/2000, Mexico s integration with the rest of North America drove mill use there 226 percent higher, a 1.7- million-bale increase. Textile Exporters Cotton Consumption Jumps in 2000/01 Not every country suffered a decline in mill use in 2000/01, with China s cotton consumption estimated 1.3 million bales higher than the year before, at 23.5 million bales. This occurred even though China s textile and apparel exports to the United States rose only slightly, from 865,000 bales (fiber-equivalent) in 1999/2000 to 906,000 bales in 2000/01. Only about 10 percent of China s total textile and apparel exports go directly to the United States. While a portion of what Hong Kong ships to the United States is derived from cotton spun in China, Hong Kong s exports to the United States were essentially unchanged from the year before at about 750,000 bales (fiber-equivalent). China s increase in cotton consumption reflected improved sales to Japan and other destinations, increased purchases by consumers in China, and increased inventories of yarn and fabric. Pakistan achieved the next largest increase in cotton consumption in 2000/01, up 450,000 bales to 8.1 million bales. Investment in Pakistan s textile industry was revitalized when cotton yields and output rebounded there in 1999/2000. After strong growth in cotton consumption between 1985 and 1995, Pakistan s cotton textile industry stagnated as what had been a rapidly soaring level of cotton output was hampered by disease and pest problems. Pakistan s switch to a policy of relatively free exports since 1995 probably also necessitated a period of adjustment for the industry, which had relied on export restrictions to indirectly subsidize its cotton purchases. By 2000/01, Pakistan had increased its consumption of cotton by 1 million bales over 2 years, and continued increases in its imports of spinning equipment suggested further gains might be ahead. Indonesia s estimated increase in cotton consumption in 2000/01, at 400,000 bales, was comparable in size to Pakistan s, but with only 1 year of rebounding consumption there the trend is less clear. Export data from the EU, Japan, Taiwan, South Korea, Switzerland, and the United States indicate that Indonesia s imports of spinning machinery actually fell about 25 percent in 1999, but rose about 85 percent in Preliminary data for 2001 suggests they continued rising after Therefore, even in the absence of reliable government statistics from Indonesia, there is evidence supporting the estimate that mill use increased from 2 million bales to 2.4 million in 2000/01. This was Indonesia s largest annual increase in percentage terms since 1988/89, and marked the first year that Indonesia s consumption has broken out of the million-bale range in which it has languished since 1992/93. Brazil s consumption also broke through a ceiling of sorts recently, rising from 3.9 million bales in 1998/99 to 4.1 million in 1999/2000, and then rising another 250,000 bales in 2000/01 to reach 4.4 million bales. Somewhat like 10 n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

11 Indonesia, Brazil s consumption fluctuated between 3.4 million and 4 million bales during , and was in part boosted by a significant currency depreciation that revitalized the competitiveness of its textile industry. However, Brazil avoided the political volatility that has frequently affected Indonesia since the onset of the Asian financial crisis, enabling it to capitalize on its improved competitiveness even faster than Indonesia, even though its currency began depreciating about 1 year later. Finally, Uzbekistan matched Brazil s 250,000-bale increase in cotton consumption in 2000/01, rising to 1.1 million bales. Uzbekistan s government has made a priority of building a textile industry. Pervasive government control of cotton marketing, exports, and access to foreign exchange have enabled Uzbekistan to boost export-oriented textile output despite what is widely considered to be a highly overvalued official exchange rate. Uzbekistan has been liberalizing its regulations requiring the surrender of foreign exchange at the overvalued official and commercial bank rates, and has stated its intention to achieve currency convertibility in the relatively near future. For example, according to the IMF, as of January 1, 1999 the percent of export proceeds that must be surrendered at the commercial bank rate was reduced from 50 percent to 30 percent, and the government pursued a policy of more aggressive official devaluation during This suggests the profitability of exporting textiles may have been improving recently, and investors may be counting on future improvements as liberalization proceeds. With investment from a wide variety of sources including Korea, Japan, Russia, and the United States, Uzbekistan s consumption was finally able to surpass the 750,000 to 950,000 bale range for the first time in more than a decade. World Consumption Remains Weak in 2001/02 At 91.6 million bales, 2001/02 world consumption is forecast 155,000 bales lower than the year before. A forecast of essentially unchanged consumption might be considered low given the combined effects of lower prices and stable expected macroeconomic outlook. While the IMF s 2002 forecast (released November 15) of world GDP growth of 2.4 percent is consistent with USDA s 2001/02 world consumption forecast, the significant decline in cotton prices in the last year would suggest cotton consumption could grow even with relatively slow world economic growth. Not only are cotton prices low with respect to recent history, they are also low with respect to polyester prices. The average of the international polyester quotes reported in Cotton Outlook, weighted by chemical fiber output in each of the countries quoted, actually rose 4 percent between January and October 2001, while the A-Index fell 42 percent. The ratio between these prices had fallen to a level last seen briefly in mid-1999/2000 and last seen for any extended period of time during 1991/ /93 (fig. 7). Figure 7 A-Index and world polyester price Cents/lb Polyester 30 Aug-2000 Nov. Feb. May Aug.-01 Source: Cotton Outlook. A-Index Crop year However, several factors suggest that world cotton consumption could decline slightly rather than increase in 2001/02. One is that although most macroeconomic forecasters are expecting steady-to-improving world GDP growth in calendar 2002 compared with 2001, the first half of 2002 is expected to be less robust than the second half. While one can generally capture the impact of GDP growth on a given marketing year by pairing it with a calendar year estimate for GDP corresponding to the latter part of the marketing year (e.g. pairing marketing year 2001/02 and calendar year 2002), the match is not always perfect. In 2001/02, most of the marketing year will be over before the foreseen improvement in calendar year economic activity raises consumption, so that marketing year 2001/02 will be a period when the global economy is weaker than during either calendar 2001 or Another factor is that increased concerns with terrorism since early in fall 2001 have increased the real or perceived costs of international trade. Since a substantial portion of clothing consumed around the world is traded across international borders at some stage, it is possible that cotton, clothing, and other traded goods might not share in any economic rebound as quickly as they have in the past. Finally, the world s largest cotton consumer, China, built inventories of yarn and fabric during 2000/01, suggesting that increased demand for textiles in China could be met without increasing cotton consumption. At 23.5 million bales, China s cotton consumption is forecast to remain at a record high, and more than 4 million bales above its recent 1998/99 low. China has accounted for a substantial portion of the increase in world cotton consumption during the last Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 11

12 2 years and an outlook for unchanged consumption in China reduces the likelihood world consumption can increase. U.S. Consumption Decline Again World s Largest While it is difficult early in the season to foresee exactly which countries will be in a position to supply more or less of the world s demand for cotton textile products in 2001/02, it seems likely that U.S. mill use of cotton will again decline more than in any other country. U.S. end-use is unlikely to resume significant growth during 2001/02, and net imports are likely to grow for the sixth consecutive year, albeit at a reduced pace. U.S. mill use is forecast at 8.1 million bales, about 800,000 bales lower than the year before. Brazil s mill use is expected to drop 150,000 bales as electricity rationing due to reduced hydroelectric output offsets the impact of continued currency depreciation. Mexico s consumption is expected to drop 100,000 bales due to continued economic sluggishness in the United States, its largest market. Similarly, India s consumption is expected to drop 100,000 bales due to the impact of a slowing world economy and reduced textile exports. On the plus side, Turkey s consumption is expected to rebound climbing 400,000 bales to 5.5 million as it emerges from its recent period of financial instability with a more competitive exchange rate. Another 200,000-bale increase is foreseen for Uzbekistan s consumption as investment continues to grow in its textile industry, and a 150,000- bale increase is similarly foreseen for Pakistan, despite the recent disruption to the region s shipping. Smaller increases are foreseen for Thailand and Bangladesh as well. World Crop Grows in 2000/01 and 2001/02 In a prelude to 2001/02 s surge, world production rose 1 million bales in 2000/01, to 88.4 million bales. Dominating the production changes of the year, China s output rose 2.7 million bales as cotton area rose for the first time since 1994/95. Brazil s crop rose 1 million bales as the new Mato Grosso frontier continued the phenomenal growth, leaving Brazil s 2000/01 output at 4.1 million bales, compared with only 1.3 million in 1996/97. Partly offsetting these increases were losses in India (1.3 million bales) Uzbekistan (780,000), Mali (420,000), Pakistan (400,000), and Mexico (306,000), where various combinations of low prices and poor weather resulted in lower yields and/or area. While the 2000/01world crop surpassed output in the previous 2 years, it was not particularly large. Output in 2000/01 was 1 million bales below the average of the preceding 5 years and was smaller than global output peaks reached as far back as 1984/85. On the other hand, world consumption in 2000/01 was at a near-record high, 4.1 million bales above the average of the preceding 5 years, and exceeding world production by 3.4 million bales. With world consumption exceeding production for the second consecutive year, cotton prices improved. The A-Index s average for the first half of the marketing year rose 32 percent from the year before. During the same time, U.S. Gulf Port prices for wheat rose 17 percent, but soybean prices rose only 2 percent and corn prices were unchanged. Perhaps more importantly for world cotton production, a microcosm of these developments also occurred within China during 2000/01. Almost half of the global surge in consumption during 1999/2000 occurred in China, and during 2000/01 China s consumption continued rising while the rest of the world s fell. China s government suspended guaranteed cotton procurement beginning with the 1999/2000 crop, and although area devoted to cotton in 2000/01 partly rebounded from the 37-year low reached during the first year of this reform, production still fell short of consumption by 3.5 million bales. With the government reluctant to allow significant imports while it struggled with huge stockpiles of cotton, and with government policy discouraging farmers from producing grain, prospective returns from cotton appeared more favorable at planting than during the year before in 2001/02. This was particularly true in eastern China, where the adoption of Bt-cotton resulted in substantially lower production costs. China s cotton area soared 800,000 hectares in 2001/02, its largest annual increase since 1991/92. While forecasting China s yields and output has proven to be a humbling exercise in many years, weather analysis and credible press reports suggest that yields in most provinces should be comparable to the those of the year before. Given that most of the increased plantings probably occurred outside of Xinjiang, and that yields in those provinces are historically lower than Xinjiang s, China s national average yield is forecast slightly lower than the year before, despite the assumption that yields look as good as last year on a province-by-province basis. With a 20-percent increase in planted area, and a slightly lower average yield, China s 2001/02 cotton crop is forecast 3.2 million bales higher than during the year before, and exactly equal to consumption at 23.5 million bales. Weather Improves for 2001/02 Crop As in China, India s cotton producers also received higher prices than the year before as they harvested their 2000/01 crop, and this, combined with large supplies of Indian rice, led to a 618,000-hectare increase in cotton area. With the return this year of a favorable monsoon to Gujarat (India s largest cotton-producing state), India s yields are expected to be their highest since 1996/97, and India s output is expected to increase 1.3 million bales to 12.2 million. West of India, a prolonged drought has entered its third year, but, ironically, Pakistan s output is expected to increase as planted area shifts from rice to cotton, a less water-intensive crop. An increase of 12 n Cotton and Wool Situation and Outlook/CWS-2001/November 2001 Economic Research Service/USDA

13 only 100,000 bales from the year before is foreseen in Pakistan s cotton crop, to 8.3 million bales. In Central Asia, yields appear to have increased in 2001/02 despite the continued drought. Uzbekistan s westernmost districts suffered from poor irrigation supplies last year, so area shifted closer to irrigation sources in 2001/02, and output is forecast 300,000 bales higher at 4.7 million bales. Larger crops have also been realized in Kazakhstan, Tajikistan, and Turkmenistan. Cotton production in Central Asia has stabilized since 1996, following a 50-percent reduction over the preceding 8 years. Area has actually trended upwards in the region despite the steady decline in world prices as state monopolies determine producer payments independent of world events. West Africa s Franc Zone has also seen increasing area since the mid-1990s, but largely because of a 1994 exchange rate correction. In 2001/02, area is estimated up 19 percent from the year before and record output is expected. Last year saw one of the sharpest-ever declines in the region s output, in part due to poor weather, and in part due to a strike by producers in Mali, the largest Franc Zone producer. World prices rose slightly last year, and producers and marketing boards in the region pursued increased output. Ironically, Mali s producers refused to plant cotton in many cases in 2000/01 due to unrenumerative prices, but returned in force to the crop in 2001/02. Mali s area is estimated up 89 percent from the year before, and with favorable rains West Africa s largest cotton producer is expected to harvest a crop of 620,000 bales, or 129 percent higher than during the year before. Overall, Africa s Franc Zone is expected to produce 1.2 million bales more cotton in 2001/02 than during the year before, and the region s exports are expected to overtake Uzbekistan s for the first time ever. Lower production is expected from a few producers in 2001/02, largely in Southern Hemisphere countries responding to the recent weakness in world prices. Brazil s crop is expected to be 800,000 bales lower as Mato Grosso s area expansion is devoted entirely to soybeans, and some area previously planted to cotton is also diverted to soybeans. Lower plantings are also expected in Australia, where the crop is expected to fall 500,000 bales, Argentina (down 185,000 bales), and Paraguay (down 50,000 bales). Iran reportedly also planted less cotton and had output further reduced by drought, resulting in a 235,000-bale decline from the year before, and output is also estimated lower in Greece (down 135,000 bales), Sudan (90,000), and Syria (75,000). World Ending Stocks Fall in 2000/01 as China Sells Government Stocks Led by a 3.4-million-bale decline in China, world ending stocks declined for the second consecutive year in 2000/01, to 38.9 million bales, equaling 42 percent of world consumption. Ending stocks also declined by 1 million bales in India, and by 300,000 bales in Australia. On average, non- U.S. ending stocks fell compared with the year before, although increases of between 100,000 and 200,000 bales were reported for Indonesia, Turkey, and Brazil. U.S. ending stocks rose 2.1 million bales as U.S. mill use plunged and exports only began to pick up late in the season. With China s stocks falling and those in the U.S. rising, China ended the year with its lowest share of world ending stocks since 1994/95, and the United States ended with its largest share since Between 1975/76 and 1994/95, world ending stocks as a share of consumption generally ranged between 37 and 42 percent (the highest and lowest 5-year averages during this period). During this rose to an average of 47 percent, almost entirely due to stock-building in China. China s share of world ending stocks had typically averaged about 25 percent from 1980 to 1994, but jumped to 42 percent on average during Through 1995, it seemed reasonable to assume that outside of China and the United States, stocks as a share of use were on a downward trend. This was consistent with the increased economic efficiency that should be possible with improved transportation, communication, and legal protection. It also reflected changes in government policies in countries like Brazil, which no longer carried large government-owned stocks. The U.S. stocks-to-use ratio was also on a generally downward trend, particularly compared to the large peaks that occurred during the 1980s. China s stockholding behavior has been more obscure, in part because there has always been substantial doubt about the accuracy of relevant statistics. China s stock levels have also been volatile, with year-to-year changes of 5 to 10 million bales punctuating its policy shifts with alarming frequency. Generally speaking, since China embarked on its opening to the world economy in 1978, its stock-to-use ratio has trended up, with marking its highest and most prolonged peak. Since 1998/99, China has substantially reduced its stocks, although they still remain high compared with much of the rest of the world and with much of China s own pre-1995 history. China reduced stocks after 1998/99 by reversing the policies that caused a buildup during the preceding years. Stocks rose after 1994/95 as China raised its farm prices while maintaining an open trade regime. China s governmentmandated farm prices proved difficult to reduce as world prices fell, and restricting imports seemed inconsistent with ensuring the profitability of its huge textile industry. Also, government policy locked older cotton in stocks in order to prevent bookkeeping losses as the market value of procured cotton tumbled below the cost of purchasing, processing, and storage. Stocks reached a staggering 106 percent of use in 1998/99, and China accounted for 47 percent of the entire Economic Research Service/USDA Cotton and Wool Situation and Outlook/CWS-2001/November 2001 n 13