USDA Cotton & Wool Outlook
14 May 2012
USDA Cotton & Wool Outlook - May 2012
World cotton production is expected to decline in 2012/13 while consumption is forecast to expand.The first US Department of Agriculture (USDA) cotton forecast for 2012/13 projects
that global cotton production will decrease while consumption rebounds, although
consumption remains below production for the third consecutive season (fig. 1). World
production is projected to fall 5 percent from 2011/12’s record to 116.7 million bales as
competing crop prices are expected to reduce area in most major producing countries.
Global cotton production similar to the 2010 crop is forecast, with China, India, the
United States, and Pakistan accounting for a combined 70 percent of the world total.
Global cotton consumption for 2012/13 is projected at 110 million bales, a 3-percent
increase from last season’s 8-year low. Modest growth in world GDP and lower cotton
prices relative to polyester are expected to improve cotton’s competitiveness and support
the rebound. World consumption will be led once again by China, India, and Pakistan,
accounting for a combined two-thirds of global cotton consumption in 2012/13.

Domestic
US Cotton Crop Projected To Rise in 2012
According to USDA’s first projections for the 2012 crop, US cotton production is
forecast at 17.0 million bales, 9 percent above the final 2011 crop estimate. Based
on the Prospective Plantings report, 2012 cotton planted acreage is expected to
approach 13.2 million acres—down nearly 11 percent from 2011 but still the second
highest planted area since the 2006 crop. The lower planted area is the result of
competing crop prices that are higher relative to those for cotton.
Lingering drought conditions throughout much of the cotton growing areas in Texas
as well as very dry conditions in the Southeast region have raised concerns as
planting of the 2012 crop progresses. As of May 6th, 36 percent of the cotton area
had been planted, compared with 24 percent in 2011 and the 5-year average of 28
percent. Despite planting progress ahead of “normal,” the dry conditions are
expected to influence the 2012 cotton crop, although not as significantly as last
season when the US abandonment rate approached 36 percent, a historic high.
While weather conditions throughout the growing season will affect final acreage
and, more importantly, production, the initial 2012 abandonment is based on the
2009-11 crop average abandonment, weighted by region, and adjusted to reflect the
current drought in Texas. With a US abandonment rate projected at 20 percent,
harvested area is estimated at 10.5 million acres for the 2012 season. Meanwhile,
the national yield projection of 777 pounds per harvested acre is based on the 2009-
11 crop average yields, weighted by region. The initial estimate is slightly below
the 2011-crop final yield estimate of 790 pounds per harvested acre.
Area for both upland and extra-long staple cotton in 2012 is forecast between the
previous two seasons. For 2012, upland cotton acreage is expected to decline in
each of the Cotton Belt regions, a first in five seasons. Based on the Prospective
Plantings report, Southwest cotton plantings are forecast at 7.2 million acres; this
represents 56 percent of the total upland area, a share that has been relatively stable
during the previous 5 years (fig. 2). Likewise, the Southeast, Delta, and West have
remained near recent levels, contributing 24 percent, 17 percent, and 3 percent,
respectively.
2012/13 Demand Expected to Expand
US cotton demand in 2012/13 is projected to increase 5 percent to 15.5 million
bales, compared with 14.8 million bales estimated for 2011/12. Larger US
supplies, lower cotton prices, and growth in the global economy are anticipated to
push demand for US cotton higher. Both US exports and mill use are forecast to
rise in 2012/13.
US exports account for the bulk of US cotton demand and, at 12.0 million bales,
2012/13 exports are expected to contribute 77 percent of the total. In 2011/12, US
exports were limited by a number of factors and represented only 27 percent of
world trade, the lowest since 2000/01. For 2012/13, the US share of global trade is
projected to rebound modestly to 32 percent. Limited US export growth is
expected, however, due to reduced foreign import demand and record foreign
stocks, although nearly a third of these are being held in national reserves by China. For more details, see the highlight section on China’s cotton reserve policy
in this report.

US cotton mill use for 2012/13 is forecast at 3.5 million bales, slightly above the
latest 2011/12 estimate of 3.4 million bales, the lowest in more than a century.
With slow growth predicted for the world economy and global cotton use, demand
for US cotton textile products is also expected to see limited expansion in 2012/13.
Consumer demand for cotton apparel products will likely mirror the movement in
the global economy.
With US cotton production projected to exceed demand for the second consecutive
season, 2012/13 ending stocks are forecast to rise once again. Stocks are projected
at 4.9 million bales on July 31, 2013, 1.5 million bales above the beginning level
and the highest in four seasons. The stocks-to-use ratio is predicted at 32 percent,
up 9 percentage points from 2011/12 but only slightly above the 5-year average.
Based on these initial supply and demand projections, the 2012/13 US upland farm
price is expected to range between 65 and 85 cents per pound. At the midpoint of
the range, the farm price would be 16 cents below the 2011/12 estimate of 91 cents.
2011/12 Demand and Stocks Unchanged in May
US cotton demand in 2011/12 remains estimated at 14.8 million bales; exports are expected to reach 11.4 million bales while mill use is estimated at 3.4 million bales. With supply marginally higher as a result of the final 2011 production estimates (see table 10 for details), ending stocks remain estimated at 3.4 million bales in 2011/12. The implied stocks-to-use ratio is 23 percent, the highest in several years.
International Outlook
World Cotton Production To Decline in 2012/13
Global 2012/13 production is forecast at 116.7 million bales, a decline of 5 percent
from a year ago, as declining cotton prices, higher production costs, and rising grain
prices combine to give a competitive edge to alternative crops. With world 2012/13
harvested area forecast to decline 5 percent from a year ago to 33.9 million hectares,
yields are projected at 750kg/hectare. In nearly all major producing countries,
production is forecast to decline in 2012/13.
In China, where 2012/13 planting is currently underway, the crop is forecast at 30.5
million bales, down 9 percent from a year ago. Although China’s spot prices for the
fiber are above world prices, strong official support for grain production, growing
national reserve stocks, labor shortages and the attendant rising costs of cotton
production have interacted to create a disincentive to producers. In addition, even
at unusually high Government support prices, farmers still saw a significant decline
in prices received in 2011/12, with support prices significantly below the peak
prices received in the fall of 2010. As a result, China’s harvested area is forecast at
5.0 hectares in 2012/13, a 9-percent decline from the previous year, with an
expected yield of 1,328 kg/ha. In recent years, the Xinjiang Autonomous Region
has accounted for 40-50 percent of China’s total production.
India’s 2012/13 production is forecast at 25.0 million bales, a 6-percent contraction
from a year earlier as farmers respond to relatively lower world prices. The
2012/13 crop forecast is based on an assumption of a favorable monsoon in a
country where a significant portion of the crop is rainfed. India’s harvested area is
forecast at 11.0 million hectares, down 10 percent from a year earlier.
Pakistan is forecast to grow 10.0 million bales in 2012/13, down 6 percent from the
previous year. The government of Pakistan has recently approved use of biotech
and new cotton varieties. Pakistan’s 2012/13 harvested area is forecast to decline 3
percent from a year ago to 3.1 million hectares. USDA has adjusted its estimate of
the average Pakistan bale weight to 155 kilograms.
Australia and Brazil are forecast to produce 4.5 million bales and 8.0 bales,
respectively, in 2012/13. For Australia, the crop forecast is a 4-percent reduction
from the record 2011 season, while in Brazil it is a 12-percent contraction from the
previous season. Harvested area in Australia is forecast at 500,000 hectares, down
14 percent from the previous year due partly to price disincentive and a reduction in
dryland cultivation. With irrigated plantings accounting for a larger share of area,
Australia’s 2012/13 yield is forecast at 1,960 kg/ha, the highest in 5 years. Brazil’s
2012/13 harvested area is forecast at 1.2 million hectares down 14 percent from a
year ago, as producers divert area toward the less risky and more profitable soybean
crop.
In the United States, 2012/13 production is forecast to rise 9 percent from previous
year’s weather-damaged crop, to 17.0 million bales. Harvested area in the United
States is forecast at 4.3 million hectares, down 8 percent from the previous year.
In the African Franc Zone, production is forecast at 3.1 million bales, a 2-percent
increase from a year ago. Harvested area in the region is forecast to rise 2 percent from a year ago to nearly 1.9 million hectares. In Mali, Burkina, and Benin, the
2012/13 crops are forecast at 800,000 bales, 700,000 bales, and 400,000 bales,
respectively, in 2012/13. In Mali and Burkina, the crops will be unchanged from
the previous year, whereas in Benin, the projection represents a 7-percent increase
from a year ago.
Global Consumption and Ending Stocks To Rise in 2012/13
World 2012/13 cotton consumption is forecast to rise 3 percent from the previous
year to nearly 110.0 million bales, as a result of lower cotton prices relative to
polyester and a slight improvement in global economic activity. The International
Monetary Fund’s (IMF) most recent World Economic Outlook Report has the global
economy growing at 3.5 percent in 2012 and 4.1 percent in 2013. The 2012 growth
estimate is weaker than the 3.9 percent growth in 2011. At the same time, current
and projected lower cotton prices are likely to improve cotton’s share of global fiber
demand.
In China, where the IMF estimates 2012 gross domestic product growth at 8.2
percent (down from a 9.2 percent growth in 2011), mill use is forecast at 41.0
million bales, down 2 percent from the previous year. China’s reserve
accumulation policy has pushed domestic cotton prices above world levels, and the
mills there have responded by reducing cotton’s fiber share of textile consumption
and substituting imports of cotton yarn. Lower spinning use in China will benefit
cotton consumption in other countries, especially Asian yarn producers.
India is forecast to consume 21.0 million bales in 2012/13, up 8 percent from a year
ago. If realized, this will be its second highest mill use on record. The IMF
estimates India’s economy to grow 6.9 percent in 2012, compared with 7.2 percent
in the previous year. India’s economic growth, however, is forecast to rebound to
7.3 percent in 2013, strengthening the domestic demand for cotton and adding to the
impact of rising textile exports. In Pakistan, 2012/13 cotton consumption is forecast
at 11.0 million bales, up 10 percent from the previous year.
Turkey is forecast to consume 5.6 million bales in 2012/13, up 6 percent from the
preceding year, as mills increase investment in new equipment and infrastructure to
expand capacity and meet growing demand for its textile products. In the United
States, mill use is forecast at 3.5 million bales in 2012/13, an increase of 3 percent
from a year ago. The IMF forecasts the United States economy to grow 2.1 percent
and 2.3 percent in 2012 and 2013, respectively, modestly higher than the growth in
2011. Brazil’s 2012/13 mill use is forecast at nearly 4.3 million bales, up 6 percent
from a year ago.
World ending stocks are forecast to a record 73.7 million bales in 2012/13, a 10-
percent increase from the preceding year. Ending stocks are forecast to rise in most
cotton producing and countries, with the notable exception of Brazil. The forecast
build-up in global ending stocks is driven by world production, which is expected to
outpace consumption in both 2011/12 and 2012/13, along with China’s continued
national reserve stocks accumulation policy. For more details, see the highlight
section on China’s cotton reserve policy in this report. USDA projects global
stocks-to-use to rise to 67 percent in 2012/13, compared with 63 percent in the
previous year. Rising stocks-to-use will put further downward pressure on already declining prices for the fiber. China’s retention of its current reserve stocks and the
expected additions to end-of-year reserves will be crucial to limiting price declines
in 2012/13.
China’s 2012/13 ending stocks are forecast at 28.1 million bales, up 14 percent
from a year earlier, raising the country’s share of global ending stocks to 37 percent.
Ending stocks in India and Pakistan in 2012/13 are forecast to rise 6 percent and 21
percent from a year ago, to 9.5 million bales and 3.9 million bales, respectively. In
Australia, 2012/13 ending stocks are forecast at 3.8 million bales, up 9 percent from
the previous year. Brazil’s 2012/13 ending stocks are forecast to decline 5 percent
from a year earlier to 8.3 billion bales, due mainly to lower expected production.
Global Cotton Trade to Contract in 2012/13
World 2012/13 cotton trade is forecast to decline 10 percent to 37.6 million bales as
a result of lower import demand by China and lower exportable supplies as
production contracts. Brazil, poised to overtake India as the world’s second largest
cotton exporter in 2012/13, is forecast to export 4.4 million bales, down 2 percent
from the record exports a year earlier. India is forecast to export 4.2 million bales
in 2012/13, down 56 percent from the previous year, due to a combination of lower
production and higher domestic consumption. Also, while the government of India
has changed its cotton export policy several times in recent months, it has tended
toward export restrictions. Australia’s 2012/13 exports are forecast at a record 4.3
million bales, a 10-percent increase from a year earlier. The United States, the
world’s leading cotton exporter, is forecast to export 12.0 million bales in 2012/13,
up 5 percent from a year earlier. Uzbekistan’s exports are forecast to grow 4
percent from a year ago to 2.6 million bales in 2012/13. The African Franc Zone is
forecast to export 2.6 million bales in 2012/13, an increase of 20 percent from the
preceding year.
Although imports are forecast to grow in several countries, contraction in China is
expected to more than offset those increases elsewhere and result in an overall
decline in global 2012/13 imports. China’s 2012/13 imports are forecast at 14.0
million bales, a 35-percent decrease from the preceding year, as a result of lower
projected consumption and availability of supplies from China’s reserve stocks
accumulated in 2011/12. Bangladesh and Indonesia are forecast to import 3.6
million bales and 2.1 million bales in 2012/13, an increase of 14 percent in
Bangladesh and 6 percent in Indonesia. Pakistan’s 2012/13 imports are forecast at
2.2 million bales, more than twice the previous year’s imports. South Korea and
Turkey are forecast to import 1.2 million bales and 3.0 million bales, a 2-percent
decrease from a year ago in South Korea, and a 30-percent increase from the
previous year in Turkey.
Highlight
China’s Evolving Cotton Reserve Policy
China’s government purchases of cotton during the first half of 2011/12 have been
extensive and have strongly affected world markets. Most of these purchases have
occurred within China, but millions of bales of imported cotton have been involved
as well. It appears that China is going to retain much of this cotton in its reserves
through the end of 2011/12 and 2012/13.
In March 2011, China announced it would purchase cotton for state reserves during
September 2011 through March 2012 whenever spot prices fell below 19,800
yuan/ton, then equal to $1.35/lb. The A-Index that month averaged $2.30/lb,
indicative of the low level of world stocks and high degree of uncertainty at that
time. In March 2012, a 3-percent increase in the procurement price was announced
for the 2012/13 marketing year, to 20,400 yuan/ton, or $1.46 cents/lb, while the
March A-Index averaged 99.5 cents/lb.
World cotton ending stocks expected for 2011/12 are equal to 63 percent of world
consumption—compared with the 44 percent realized in 2010/11—and world prices
are now substantially lower than a year earlier. World prices are also at an
unusually large discount relative to prices in China. While China’s policies have
supported the world price of cotton during 2011/12 to some extent, they have also
put its textile industry at a competitive disadvantage. Continuing to support farmers
through reserve purchases necessitates tradeoffs, and predicting how China’s
government will balance its competing goals requires careful consideration of the
roots of China’s decision to build reserves.
Since 40 percent of the world’s cotton consumption occurs in China, China
arguably bore a disproportionate share of the impact of 2010/11’s record high
cotton prices. This and another important factor suggest that China’s government
might move forcefully to avoid future surges in world prices and to limit China’s
reliance on imported cotton. The other factor is that the roots of China’s policymaking
are from a tradition of centralized planning. Importing cotton in 2011/12
may have been regarded as a precautionary measure that could help reduce import
needs in a future year of unusually high prices. Acquiring a high level of reserve
stocks through either imports or domestic purchases would position China to
respond to future price surges by drawing down stocks.
China attempted to follow this policy in 2010/11, but was forced to abandon it
relatively early in the year due to inadequate levels of reserves. China has pursued
a relatively active policy of alternatively buying for its reserves and selling from
them to moderate price swings since cotton markets were liberalized in 1999.
Arguably, the last several years of global commodity price volatility has led to a
reassessment of the preferred minimum level of policy stocks in China, which is
now substantially higher than it was a few years ago. This means that China’s
commitment to retaining these stocks is credible and would imply that, for the
immediate future, most of the cotton currently in the reserve would be unavailable
for consumption.
Cotton prices in China are typically higher than world prices, due to limitations on
imports through careful allocation of quotas. Spot prices (CC328) during 2005-mid 2010 averaged 28 percent above the A-Index, with only a standard deviation of 8
percent in that premium. Since December 2011, this premium has averaged 40
percent, and compared with Indian prices the premium is even higher. India’s
policy during the current marketing year has been the converse of China’s, with a
demonstrated willingness to impede export shipments that has inflated Indian
cotton’s discount to world prices on domestic markets. As a result, the premium of
prices in China to prices in India has gone from a 2005-2010 average of 42 percent
to 60 percent in the last 5 months. Consequently, China’s yarn imports have surged
compared with year-ago levels during the most recently published months. While
China’s economies of scale, efficient infrastructure, and industry agglomeration
make it perhaps the most efficient location for textile production, relatively high
raw material costs can offset some of those benefits.
China’s recent 5-year plan is reorienting its economy towards greater domestic
consumption and output has been shifting towards higher value-added industries as
well. Thus, a support policy for domestic cotton farmers that hinders textile export
competitiveness may not be inconsistent with policymakers’ goals. Alternatively,
China could develop channels that allow the textile industry to access reserve stocks
at prices below those at which they were purchased. In 2006, for example,
favorable import quota allocations were offered to textile companies that purchased
cotton from Xinjiang early in the season. Also, temporary subsidies have been
offered to grain and oilseed processors at times to facilitate use of stocks acquired,
thus supporting farmer prices.
For 2012/13, many uncertainties remain about the direction of China’s national
reserve stocks policy. China’s government has not made any statements on whether
or how national reserves will be used to meet the expected widening gap between
production and consumption in 2012/13. Given the significant and growing
disparity between China’s support price and the average world price, it will be
difficult for China’s government to reduce the size of the reserve in 2012/13; on the
other hand, China may wish to limit reserve growth to meet limitations on storage
capacity or to increase the supply of cotton to domestic mills.
In its 2012/13 supply and demand projections for China, USDA is assuming modest
growth in the reserve of about 15 percent. This growth level implies reserve
releases which, in turn, would reduce China’s need for imports to 14.0 million
bales, about a third below 2011/12. If policymakers in China choose not to release
reserves, both imports and ending stocks would be higher than USDA is currently
projecting, illustrating an interesting paradox that higher stocks in China—driven
by sequestration of cotton in the reserve—are likely to be supportive of the world
cotton market in the short-term. USDA will modify its supply and demand
projections for China in future releases as the direction of policy becomes clearer.
Published by USDA Economic Research Service
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