A big aftershock of the Sept. 11 terrorist attack on the World Trade Center has been its negative impact on the U.S. economy, a situation that threatens to erode the one thing that could turn cotton prices around — world demand.
“The United States is the single-largest market for the world's exporters, especially of consumer goods,” explained Mark Lange, National Cotton Council vice president, policy analysis and program coordination.
“If the U.S. consumer reduces spending, the economies of the Asian exporters will face economic troubles perhaps as severe as the credit crisis of 1997-98,” he said. “Such a downturn in economic fortunes would impact textile and apparel demand in foreign markets. With the expectation of a record or near-record world cotton crop, any weakness in demand will press further on already-low world raw cotton prices.”
Simply put, the world and the United States are sitting on too much cotton. And now, demand for cotton may be slacking off.
The situation was decidedly different a year ago, Lange noted. With world production forecast at 88.3 million bales and mill use at an estimated 91.8 million bales, world textile mills drew down stocks during the 2000-01 crop year.
The latest estimate of world production is 96.2 million bales, a world record surpassing the 95.7 million-bale crop of 1991-92. The large crop results from generally favorable growing seasons across much of the Northern Hemisphere and increased acreage in most of the major cotton-producing countries.
Mill use of cotton is forecast to reach 92.6 million bales, also a world record, exceeding the previous record of 91.9 million bales for 1999-2000. But the numbers still translate into larger supplies and, as Lange pointed out, “the demand side of the market is the most worrisome.”
The latter is reflected in USDA's recent raising of last year's carryover to an estimated 6 million bales, some 500,000 bales higher than estimates as late as August 2001. “It's likely that much of the unexpected stock estimate could be attributed to overestimates of mill use for the past six months,” noted Lange.
Meanwhile, imports of cotton textiles and apparel are surging, due to the strength of the U.S. dollar, noted Lange. “In calendar year 2000, imports of cotton textile and apparel products amounted to the equivalent of 15.7 million bales and are on a path to reach 16.2 million bale equivalents in 2001.
“When importers see what the U.S. dollar will buy in the overseas market, U.S. textile interests lose. Just since the first of the year, 84 U.S. textile mills have closed their doors and over 29,000 jobs have been lost.”
The poor state of U.S. textile mills means that the United States must export more cotton. Indeed, this year may be the first time in 17 years that exports exceed mill use in the United States.
With the increase in stocks and a record U.S. crop of 19.99 million bales expected, U.S. supplies are pegged at 26 million bales. Mill use is now forecast at 8.3 million bales, down from a high of 11.4 million bales in 1997-98.
Adding mill use and exports, which USDA predicts will reach 9 million bales, and subtracting the total from supply would produce ending stocks of 8.7 million bales and a 50.3 percent stocks-to-use ratio.
To reach 9 million bales in exports will take some doing, according to Lange. Basically, raw cotton importers or competing raw cotton exporters must be induced to hold more stocks.
In order to do that, “U.S. raw cotton exports need to be very competitively priced. The USNE (price of U.S. cotton delivered Northern Europe) continues to approach the A Index with the gap now standing at less than 4 cents. To displace further competition or encourage speculative buying, the USNE will likely need to be part of the A Index. This implies that U.S. futures prices could erode several cents more from the current level of 36 cents.”