TUCSON, Ariz. -- Strong world trade and declining world stocks could be somewhat positive for cotton prices in 2006-07. Yet, this year’s crop could an even costlier one to produce, according to Gary Adams, vice president, economic and policy analysis, National Cotton Council. Adams spoke at the NCC annual meeting.

“Energy prices have affected each segment of the cotton industry,” Adams said. “Crude oil prices have been on the rise since 2002. Over just the past two years, we’ve seen spot crude oil prices roughly double. In the wake of Hurricane Katrina, we saw those prices hit $65 per barrel, weaken toward the end of the year and return to that level recently.”

Adams noted that current projections by the Energy Information Administration suggest that crude oil prices will remain strong through the rest of 2006, due to tight production capacity. “Overall global demand is remaining strong and uncertainties in the Middle East are contributing to increased prices. As those crude oil prices increase, we’ve seen diesel prices follow suit. So it looks like consumers will be paying more for gasoline and diesel fuel they did in 2005.”

In addition, natural gas prices have also increased, which has led to fertilizer prices of 30 percent to 40 percent above year-ago levels.

Overall economic global growth for 2006 is forecast at 4.3 percent, slightly under the strong performance of 2005. The U.S. economy also posted fairly good gains in 2005, at 3.5 percent growth, despite “higher energy prices, rising short-term interest rates and the disruptions caused by the hurricane season.”

Meanwhile China’s economic growth for 2005 is estimated at just under 10 percent. Growth for 2006 will still be strong, but slightly lower than 2005. India’s economy is estimated to have grown by 7 percent in 2005 and is forecast to grow by 6 percent for 2006.

Adams noted that China has introduced a new exchange rate regime which allows a managed float of its currency. “As a result, throughout 2005, we saw China’s currency strengthen by 2.5 percent relative to the dollar.”

Current projections by the Congressional Budget Office suggests a U.S. deficit for fiscal 2006 of approximately $330 billion, slightly larger that the fiscal 2005 deficit. The larger deficit is due mostly to additional expenditures for hurricane relief, according to Adams. The Bush administration’s budget has an even more pessimistic outlook of $400 billion, and growing.

The U.S. agricultural economy posted its two best years ever in net farm income, in excess of $80 billion in 2004 and just over $70 billion in 2005. A lot of the differences between the two years can be explained in higher production expenses for 2005, up $12 million from the previous year, and up $22 billion from 2003.

U.S. cotton textile imports continue to increase, noted Adams, at just under 22 million bales. The total retail market for the United States is 23 million bales, meaning about 95 percent of the market is being satisfied by imports. “Ten years ago, we would have had roughly 50 percent of the retail market satisfied by imported products.”

Imports from China have grown to 4.3 million-bale equivalents, and “we expect further growth from China, India and Pakistan. The textile industries of NAFTA countries have borne the brunt of these increasing imports, and further declines in those industries are expected in 2006.”

Overall domestic mill use for the current marketing year is 5.9 million bales, but Adams expects pressure from China to continue to push mill use lower. Mill use is expected to come in around 5.7 million bales for 2006-07.

Today, the United States exports 4.9 million-bale equivalents of yarn and fabric, meaning that a very narrow segment of its domestic market, about 1 million-bale equivalents, is in the “dirt to shirt” category — cotton grown and spun into fabric or yarn in the United States. “This means that approximately 90 percent of the U.S. cotton crop at some point in the processing moves into export channels.”

Stronger internal prices for cotton in China should translate into an increase in planted cotton area in China for 2006, according to Adams. Subsequently, China’s cotton crop could recover to 28 million bales. Even though China’s internal cotton prices remain higher than polyester, “we expect further expansion in mill use of cotton, a forecast 48 million bales, with 50 million bales as a possibility.”

Because of this strong demand, China is expected to import between 16.5 million and 17 million bales in 2006. “From the U.S. perspective, if we’re exporting 70 percent of our crop, a lot will hinge on the purchases that China makes.”

India is also expected to prosper in a post-quota environment brought on through WTO, according to Adams. Mill use is expected to continue growing in 2006. With the help of Bt cotton and better cotton varieties, India is also increasing its cotton yields. “At some point, India could increase its production and enhance its presence as a exporter.”

The world traded just over 42 million bales of cotton in 2005, about 10 million bales higher than in 2004. Adams projects a slight decline to 41.25 million bales in world trade for 2006.

China, Turkey and Mexico account for around 70 percent of U.S. exports, noted Adams.

Turkey has imported approximately 3.5 million bales for the 2005 marketing year. “We think their internal production will expand, which may lead to a slight reduction in their overall imports, but it is still expected to remain above 3 million bales.

“The Mexican textile industry is facing the same pressure as the U.S. textile industry — trying to compete with Asia, Adams said. “They are losing share of the U.S. retail market and as a result, their overall imports of raw cotton have declined from 2 million bales to a forecast 1.3 million bales for 2006.”

Meanwhile Pakistan’s mill use has outpaced its domestic production and now the country has emerged as a larger importer of cotton, particularly as a customer of U.S. extra long staple cotton. “We expect them to be a slightly larger importer. However, the European Union is going in the opposite direction. Declines in their mill use are leading to declines in their imports, expected to be down to about 2.3 million bales.”

On the export competition side, India is expected to increase its exports from 1.8 million bales to 2.3 million bales for 2006-07. “Brazil has tremendous potential to expand as much as 250 million acres of new land into production. We’ve also seen some increases in the amount of support that the government gives to agriculture.”

On the other hand, “Brazil’s currency strengthened against the U.S. dollar by approximately 15 percent in 2005. The effect of this is to essentially increase their cost of production and reduce their competitiveness in the world market.

“Current expectations call for a drawdown in Brazil’s cotton acreage. We see them as a smaller exporter in the short term, going from 2 million bales to 1.4 million bales. Longer term, we still have to consider Brazil as a country with tremendous potential if it addresses some of its transportation and infrastructure issues.”

Australia is expected to recover from smaller crops, “and we expect to see production of around 3 million bales. Subsequently, with the draw down of their stocks, they’ll be around 3 million bales in exports as well.”

The cotton-producing areas of West Africa account for about 4 percent of world cotton production, but “they have a small textile industry, so 90 percent of their fiber production goes into the world market.”

Adams projects that the countries of the former Soviet Union, collectively the second-largest exporter on the world market, will recover lost acreage and increase exports by roughly 500,000 bales in 2006.

The current estimate for U.S. exports for 2005-06 is 16.4 million bales. Noted Adams, “We expect smaller exports for the United States of 15.8 million bales for 2006-07, as overall world trade declines. We’re assuming the loss of Step 2 in this outlook, which could have a negative effect on our exports.”

Adams projects a U.S. average yield of 785 pounds per acre and average abandonment of 9 percent. “That puts our crop at 21.4 million bales, down about 2.3 million bales from 2005. But the potential is there if the weather cooperates to have another 23 million-bale crop. We also know that if dry conditions persist in the Southwest, we could see a smaller crop of 19 million to 20 million bales.”

The last two years, overall production has exceeded combined U.S. mill use and exports and cotton stocks have been building. They’re estimated to reach 7 million bales by the end of the current marketing year. Current projections for 2006-07 put production at slightly less than total use, creating a slight reduction in U.S. stocks, “although stocks are still historically large.”

The council projects world mill will use just under 120 million bales and world production will be just over 116 million bales. The high use will lead to a drawdown in stocks, to just above 50 million bales. “That’s still a lot of stocks to work through, but the balance sheet is somewhat supportive of prices,” Adams said.

e-mail: erobinson@prismb2b.com