Cotton: Low Prices, Weak Demand, Uncertain Macroeconomy Making For Challenging Year

MEMPHIS, Tenn. — February 6, 2016 — National Cotton Council (NCC) economists say 2016 will be another challenging year for the U.S. cotton industry — with low cotton prices, ample global stocks and uncertainties regarding global mill cotton use.

Dr. Jody Campiche, the NCC’s vice president, Economics & Policy Analysis, told delegates at the NCC’s 78th Annual Meeting in Dallas, Texas, today 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 projected to decline in 2016, Campiche noted. She said 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. With abandonment set at 11 percent for the United States, Cotton Belt harvested area totals 8.1 million acres. Using an average U.S. yield per harvested acre of 831 pounds generates a cotton crop of 14.0 million bales, with 13.4 million upland bales and 595,000 extra-long staple bales.

However, it is important to note that 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 respondents underscored the very difficult financial conditions facing cotton producers. For the past two years, U.S. cotton producers have struggled with low cotton prices and high production costs – and with current futures markets indicating steady prices, producers’ economic situation is not likely to improve in 2016. Some producers, in fact, will find it very difficult to obtain production financing for the current year.

Posted February 8, 2016

Source: NCC