USDA Cotton and Wool Outlook: May 12, 2016

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World Cotton Consumption to Exceed Production in 2016/17

The initial U.S. Department of Agriculture (USDA) cotton projections for 2016/17 indicate that global cotton consumption will expand slightly and surpass production for the second consecutive season (fig. 1). World cotton mill use is projected to rebound in 2016/17 to 110.8 million bales after a slight decrease in 2015/16. Modest growth in global gross domestic product (GDP) and the lagged effect of lower cotton prices are expected to support mill use in most countries. China, India, and Pakistan are expected to lead world cotton mill use and account for a combined 62 percent of the total in 2016/17, similar to 2015/16.

Global cotton production is forecast at 104.4 million bales in 2016/17, a modest increase after a 16-percent reduction in 2015/16 that resulted from inclement weather and pest damage in a number of producing countries. Despite reduced global area expectations in 2016/17, a yield rebound is responsible for the crop increase. Based on USDA’s initial projections, India, China, and the United States are expected to account for a combined 63 percent of global cotton production in 2016/17, compared with 64 percent in 2015/16.

Domestic

U.S. Cotton Production Projected to Rise in 2016

According to USDA’s initial projection for the 2016 crop, U.S. cotton production is forecast at 14.8 million bales, 15 percent above the final 2015 estimate. Based on the Prospective Plantings report, 2016 cotton area is expected at 9.56 million acres, 1 million acres above 2015. The higher planted acreage is largely due to a return of area that was prevented from being planted last season due to wet conditions. In addition, relative prices favor cotton slightly over competing crops.

Area for both upland and extra-long staple (ELS) cotton is forecast higher in 2016. For the upcoming season, upland acreage is projected larger in three of the four Cotton Belt regions—only the Southeast is expected to plant fewer cotton acres in 2016. Based on Prospective Plantings, the Southwest upland area is projected at 5.6 million acres, compared with 5 million acres in 2015 (fig. 2). The Southwest is forecast to account for 60 percent of the upland area in 2016, similar to the last several seasons. Cotton acreage in the Southeast is expected to reach only 2.1 million acres in 2016, slightly below a year ago and the smallest there since 2009. However, the Southeast is forecast to account for approximately 23 percent of the upland acreage in 2016, a long-run average.

In the Delta, 2016 cotton area is projected to rebound from a record low of 985,000 acres to 1.4 million acres as acreage returns to cotton. If realized, Delta area would account for 15 percent of the U.S. upland acreage, which is above the 5-year average. In the West, 2016 upland area is expected at 200,000 acres, an increase from a near-century low recorded last season. Upland cotton in the West will likely account for only 2 percent of the total U.S. acreage in 2016. ELS cotton is mostly grown in the West, where 90 percent of the 215,000-acre total is expected to be planted in 2016. California continues as the dominant ELS-producing State.

While drought conditions remain in the irrigated West, rainfall in the Southwest has alleviated much of the dry conditions experienced there over the last several seasons. Weather conditions will continue to influence cotton plantings, crop progress and production. As of May 8th, 26 percent of the U.S. cotton area had been planted, equal to the 5-year average. However, several States have considerable variations; Missouri and Arkansas have planted 90 percent and 57 percent, compared with their averages of 29 percent and 39 percent, respectively. On the other hand, Louisiana and North Carolina have planted only 39 percent and 10 percent, compared with their averages of 61 percent and 27 percent, respectively.

U.S. cotton harvested area for 2016 is projected at 8.8 million acres, 9 percent above the 2015 estimate of 8.1 million acres. The preliminary 2016 forecast is based on the 2006-15 crop average abandonment, weighted by region; however, the Southwest abandonment is estimated well below average at 12 percent due to the favorable moisture conditions this spring. Overall, the U.S. abandonment rate is forecast at 8 percent, compared with 2015’s 6 percent. The national yield is projected at 807 pounds per harvested acre and is based on the 2013-15 crop average yields, weighted by region, with the Southwest yield adjusted upward to reflect the improved moisture conditions. The initial 2016 U.S. yield estimate is above the final 2015 estimate of 766 pounds per harvested acre.

Cotton Demand Expected to Rise in 2016/17

U.S. cotton demand (mill use plus exports) in 2016/17 is forecast to increase 12 percent to 14.1 million bales, as exports are projected to rebound. In 2015/16, the limited supplies—particularly of higher quality cotton—and sharply lower imports by China reduced demand to a 30-year low. For 2016/17, U.S. exports continue to account for the majority of U.S. cotton demand—74 percent—and, at 10.5 million bales, U.S. exports are forecast to increase from the 9 million bales estimated for 2015/16. With projected world cotton trade reduced slightly in 2016/17, the United States is forecast to improve its trade share. In 2016/17, the U.S. share of global trade is forecast at 32 percent, up from last season’s 26 percent but similar to the share recorded in 2014/15. U.S. cotton mill use for 2016/17 is estimated to remain flat at 3.6 million bales, supported by the continued demand for U.S. cotton textile product exports.

With U.S. cotton production expected to exceed demand in 2016/17, ending stocks are projected to increase from the current season. Cotton stocks are forecast at 4.7 million bales on July 31, 2017, the highest since the 2008/09 season. However, the stocks-to-use ratio is estimated only slightly higher for 2016/17 (33 percent) than for 2015/16 (32 percent). Based on these initial supply and demand projections, the 2016/17 U.S. upland farm price is expected to range between 47 and 67 cents per pound. At the midpoint of the range, the farm price would be marginally below the 2015/16 estimate of 58 cents per pound and the lowest since 2008/09.

2015/16 Production Estimates Finalized in May

U.S. cotton production for 2015/16 was revised in May as the National Agricultural Statistics Service released its final cotton production estimates (table 10). With the crop estimate slightly higher, modest adjustments were made to harvested area and yield; harvested area for 2015/16 was increased marginally to 8.07 million acres, implying an abandonment rate of 6 percent. At the same time, the national average yield was reduced marginally to 766 pounds per harvested acre, the lowest since 2003/04. With 2015/16 supply nearly unchanged, a 500,000-bale reduction in U.S. exports, reflecting lower-than-anticipated sales to date, raised ending stocks to 4 million bales.

International Outlook

World Cotton Production to Rise in 2016/17

USDA’s early projection for the 2016/17 global cotton crop is 104.4 million bales, 5 percent (4.9 million bales) above the 2015/16 estimate. A rebound in the global yield is expected to account for the boost in production as a slight reduction in total harvested area is projected in 2016/17. World area is forecast lower at 30.7 million hectares (75.8 million acres), the lowest since 2009/10. The global yield is expected to recover from a 12-year low in 2015/16 to 741kg/hectare (661 pounds per acre).

The two largest producing countries—India and China—are forecast to account for nearly half of the world cotton crop in 2016/17. India is forecast to remain the largest producer for the second consecutive season. India’s 2016/17 cotton crop is projected at 28 million bales, a 4.5-percent increase from the preceding year. Although area is forecast slightly lower at 11.8 million hectares, India’s yield is expected to rebound from 2015/16’s 10-year low to 517 kg/hectare.

China is forecast to produce 22.5 million bales of cotton in 2016/17, 5.5 percent below a year earlier and the smallest crop since 2000/01. Area is expected to decline to only 3.1 million hectares, the lowest since 1949/50, as Government policies have reduced supports for cotton farmers, especially in eastern China. With an increasing concentration of area in the higher-yielding Xinjiang region, the national yield is forecast at a record 1,580 kg/hectare.

Pakistan, like India, is projected to have a larger crop in 2016/17. Pakistan’s production is forecast at 9 million bales, compared with an estimated 7 million bales for 2015/16, due mainly to an anticipated recovery from severe pest problems in 2015/16. In contrast, Brazil’s 2016/17 production is forecast marginally below the current crop. Brazil’s crop is forecast at 6.4 million bales in 2016/17 as a decline in area more than offsets an increase in yield.

Global Cotton Consumption Continues Expansion in 2016/17

Global cotton mill use is forecast at 110.8 million bales in 2016/17, up 1.8 million bales (1.6 percent) from 2015/16, reflecting modest growth in the world economy and continued low cotton prices. Cotton mill use is led by China and India, with a combined 2016/17 consumption forecast at 58 million bales, or 52 percent of the global total. China’s cotton mill use is projected to grow 3 percent to 33.5 million bales in 2016/17. China’s consumption will benefit from local textile mills gaining access to raw cotton from the national reserve at competitive prices. Sales from the national reserve began in early May and have included both domestic and higher quality imported cotton (see the Highlight section in this report for more reserve sales program details). China’s mill use growth in 2016/17 is likely to be supported by declining cotton yarn imports, which are expected to continue but at a slower pace than in 2015/16.

India’s cotton consumption in 2016/17 is projected unchanged at 24.5 million bales, representing 22 percent of global cotton mill use. Further expansion is seen as limited at this time, particularly as cotton yarn exports to China are reduced. Cotton mill use in Pakistan is forecast at 10.5 million bales in 2016/17, 2 percent above 2015/16 but below the 12-million-bale record attained nearly a decade ago.

Consumption growth is also expected in a number of other countries, including Turkey (+1 percent), Bangladesh (+5 percent), and Vietnam (+8.5 percent).

World Cotton Trade Slightly Lower in 2016/17; Stocks Decline Further

World cotton trade in 2016/17 is forecast at 33.1 million bales, 3 percent below the previous season and the lowest since 2008/09. Reduced trade is largely projected due to a recovery in production in several major producing/spinning countries and limited import expectations for China. Raw cotton imports by China are expected to reach only 4.5 million bales in 2016/17, compared with the 4.25 million bales estimated for 2015/16.

The initial projection of lower global exports represents the fourth consecutive annual decrease, but trade forecasts are mixed for the major exporters in 2016/17. Shipments by the United States are expected to rise with its crop increase; likewise, a larger crop is forecast to provide additional exports for Australia. Exports from Brazil, on the other hand, are forecast to decline slightly as a result of lower supplies. Meanwhile, exports by India are projected to decrease nearly 2 million bales in 2016/17 to 3.8 million bales, largely the result of lower shipments to Pakistan where the crop is forecast to increase 29 percent. Exports from the rest of the world are expected to remain near 12 million bales in 2016/17.

With global cotton consumption forecast to exceed production for a second consecutive season, 2016/17 world ending stocks are projected to decline 6 percent from 2015/16. Stocks in 2016/17 are forecast at 96.5 million bales, 6.3 million bales below the current season (fig. 3). However, China will continue to hold the majority of these stocks despite policies that are expected to reduce their stocks considerably over several seasons. In 2016/17, stocks in China are forecast to decline 10 percent to 56.7 million bales but still account for nearly 60 percent of the global total.

Stocks in India and the United States are projected to rise in 2016/17 with larger crops, while stocks in Brazil are forecast to decline to their lowest level in 4 years.

Highlight

Large Sales from China’s National Cotton Reserves Expected

After a 20 month hiatus, China has resumed signiíĩcant sales from its Government cotton reserves. Import quota for cotton in China is more limited now than it has been for more than a decade, and prices for reserve sales are now partly determined by world price levels. Import constraints on cotton have increased the textile industry’s need for additional sources of fiber in China, and more competitive pricing has resulted in increased purchases of cotton on offer compared with the previous auctions during the summer of 2015. About 150,000 tons of domestically produced and imported cotton was sold from the reserve from May 3-9, and continued strong sales over a 17-week auction period would result in the largest decline in China’s cotton reserve since 2002/03.

China acquired unprecedented levels of Government stocks of cotton over 2011/12- 2013/14 in the course of supporting its domestic cotton price 40-50 percent above world prices (fig. 4).1 Imported cotton was also incorporated into the reserve, and during the first week of reserve sales, imported cotton dominated. Reserve sales of domestic cotton during the first week of May 2016 had a base price 26 percent above the current A Index, and, with quality discounts, realized an average price 18 percent above the A Index. For imported cotton, the premiums were 37 percent for the base price and 24 percent after adjusting for quality.

The reserve sales price is determined by a combination of the world price (adjusted for import taxes, including a 1-percent tariff and a 13-percent value-added tax) and domestic market prices. One result is that domestically-produced cotton has been sold during May 2016 at prices about 40 percent less than the reserve purchase prices that prevailed during the years the cotton was acquired. The combination of discounts relative to the initial purchase price and years of storage costs will result in large losses to the Government.

Since the late 1990s, China has used varying combinations of reserve management, import quotas, and variable import tariffs to maintain domestic cotton prices in China 25-30 percent above world levels. The unusually high support levels over 2011/12-2013/14 were intended to mitigate the impact of rising wages and lagging mechanization on the costs of producing cotton in China. Since 2014/15, China has shiíted much of its support for cotton producers to a system of direct subsidies and focused support on Xinjiang, the most highly mechanized producing province. The Government has also permitted domestic prices to fall closer to world prices. These recent policy changes are expected to reduce China’s cotton production by 25 percent between 2014 and 2016. However, given the extremely high level of China’s Government reserve, USDA’s long-run outlook projects that China’s cotton stocks/use ratio is unlikely to drop below 60 percent until 2023/24.2 During the period of stocks drawdown, China is likely to restrict the availability of import quota compared to pre-2013 levels.

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