Good morning. Mr. Chairman, thank you for the opportunity to address the 2009 Beltwide Cotton Conferences regarding cotton’s economic landscape. This past year’s market will not soon be forgotten by the cotton industry. Uncertainty and volatility have been the rule, rather than the exception. The effects of an erratic futures market were felt throughout the industry. 2008 also brought sharply higher fuel and fertilizer costs. In addition, the deteriorating financial situation and faltering economy raised doubts about the consumer’s willingness and ability to buy textile and apparel products. As a result, the cotton market, along with other commodities, exhibited a bearish tone in the second half of the year.
For 2009, a big question will be the extent to which these problems linger and the potential for recovery. In the next few minutes, I will focus on three issues affecting U.S. cotton’s economic situation: the current demand climate for cotton, the importance of US cotton exports, and the implications of recent movements in energy prices.
Cotton Demand
Cotton demand finds itself facing a very difficult climate. Turmoil in financial markets has restricted credit availability, while the economic downturn and increased job losses have made consumers more cautious in their spending patterns. Also, manmade fibers continue to provide strong competition for cotton.
The effects of the current macroeconomic situation are evident in mill use. USDA’s latest numbers lowered estimates for the ’08 marketing year mill use to 116.6 million bales – down from 123.4 million bales in ‘07. Keep in mind that the 2008 marketing year covers the period from August 1, 2008 through July 31, 2009.
As textile mills face tighter credit conditions and reduced orders from retailers, declines are expected in most countries. China – which accounts for more than 40% of world mill use – is expected to decline for the first time since 1998. The big question is whether the current estimates capture the extent of the decline as some industry estimates are even more bearish.
The latest textile trade data also suggests a slowdown in demand. The United States is the largest retail market for textile and apparel products, and imported products supply more than 90% of US consumer demand. In 2008, imports consistently ran below year-earlier levels. In the previous years, imports were generally running 5% above year-earlier levels.
While the U.S. is the largest importer, China is the largest exporter of textiles and apparel. Last year, growth in China’s exports slowed sharply from the 20-plus percent growth registered between 2005 and 2007.
One of the reasons behind the softer demand situation is the current pessimism in the general economy. In 2008, economic growth slowed in most countries, and recent estimates by the International Monetary Fund call for calendar ‘09 to be worse than ‘08. Developed, or advanced, economies are expected to contract by 3/10 of 1% in 2009. In recent years, these economies have grown by 2 to 3% per year. In developing economies, growth is expected to slow to 5% -- down from the 6 to 8% of the recent past.
Recovery is expected in 2010, but not to recent historical levels. The IMF stresses the uncertainty around the current economic climate, and notes that the projections are based on current policies. The effectiveness of current or future stimulus packages will change the outlook.
For cotton demand, another factor to keep an eye on is the competition from manmade fiber. Cotton continues to face strong competition from polyester. The situation differs somewhat across countries, as evidenced by data for China, India, and Pakistan – which together account for two-thirds of global mill use. Price relationships in these countries illustrate the competitive landscape. In China, internal policies and import controls have generally supported cotton prices at 120 to 130% of polyester prices. In recent weeks, a sharp decline in polyester prices has pushed the ratio above 160%.
Cotton and polyester prices in India are currently at similar levels, as exhibited by the roughly 1-to-1 price ratio of recent months. However, this is a different picture than the previous two years when cotton prices were below polyester prices. In Pakistan, the relationship has been somewhat more stable, with cotton prices being 80 to 90% of polyester prices.
The current USDA estimates translate into a 5.5% decline in mill use from the ’07 level. Since 1972, there have been 4 previous years with declines greater than 2%, and the largest decline was 5.4% in 1974. While this year’s estimated decline is unmatched in recent memory, it is important to note that recoveries in demand have generally been fairly quick and robust.
US Cotton Exports
We are all too familiar with the dramatic shift in demand for US cotton. The US textile industry has been devastated by a surge in imported textile products. As a result, the most consistent and stable customer for US cotton is less than half the size of a decade ago. Fortunately, the losses have slowed, and the much-needed economic assistance provided in the 2008 farm bill should stabilize the industry going forward and allow the US cotton industry to maintain a domestic demand base around 4 million bales.
While US textile mills are critically important to the overall health of the industry, their expected usage totals only 30% of current US cotton production. The remaining 70% of the crop must find a home in the export markets. In recent years, the top three destinations have been China, Mexico and Turkey. For the current marketing year, the slowdown in global mill demand is having a direct impact on US exports. The latest USDA estimate of 12.25 million bales is achievable, but weekly sales and shipments need to improve.
In part, US exports depend on the gap between international mill use and production. Between 1998 and 2006, the gap between the two expanded as growth in mill use outpaced increases in production. The downturn in ’08 mill use has narrowed the gap to just under 12 million bales.
There is a strong correlation between the international deficit and US cotton exports. Between 1998 and 2005, international demand outpaced production, and the differential between the two grew. Over the last couple of years, weakness in demand and better-than-expected international crops have narrowed the gap. Going forward, the US cotton industry will rely heavily on exports. It is in the interest of the industry for the deficit in international markets to grow, and that will largely be dependent on global demand growth.
Energy and Input Prices
The final area to address is something that directly affects the bottom line of farmers – that is the amount paid for inputs necessary to produce your crop. The 2008 crop was the most expensive to produce as crude oil rose above $140 per barrel, which equates to about $3 per gallon. Retail gasoline and diesel prices went above $4 per gallon, with diesel approaching $5 per gallon.
One of the few bright spots in recent months has been the decline in energy prices. Crude oil prices have fallen back in the range of $1.30 per gallon. Likewise, diesel prices have declined to levels more in line with those of 2006 and 2007. Looking at 2009, the latest projections by the Department of Energy call for oil prices to stay near current levels. They project retail diesel prices in the range of $2.50 per gallon, which is quite a bit lower than current levels.
In a similar manner to crude prices, natural gas prices weakened in the second half of last year. DOE calls for prices to hover around $6 per thousand cubic feet in 2009. While the relationship between natural gas and nitrogen fertilizer prices is not as strong as the relationship between crude oil and diesel, recent USDA data indicate that fertilizer prices are softening from the ’08 highs.
Translating input prices into per-acre costs of production is always difficult because of differences in soils, production practices, and management decisions. While individual costs vary dramatically, the average costs of purchased inputs for cotton production in 2008 is estimate at just under $500 per acre – representing a $65 increase from ’07 and more than $100 above 2006.
For this year’s crop, current prices should provide some relief in costs. While costs may not drop back to the 2006 level, a number in the range of 2007 or slightly lower seems very plausible.
The impact of lower oil prices extends beyond the price of inputs. The renewable fuels mandate has created a more direct linkage between oil prices and corn prices. Lower oil and gasoline prices directly affect the price that ethanol plants are able to pay for corn as a feedstock for ethanol production. Separate research at Iowa State University and Purdue University indicate that at current oil prices, the break-even corn price for ethanol plants ranges between $2.50 and $3.50 per bushel. If current oil prices persist, as the Energy Department projections suggest, then grain prices will remain under pressure as well. This will be another factor that farmers must consider as they make this year’s planting decisions.
Summary
As noted at the outset, volatility defined the cotton market in 2008. The move from 90 cents to 40 cents in the December ’08 contract in such a short span of time is unprecedented. In recent weeks, prices have rebounded from the November lows.
At this point, the cotton market, like most commodity markets, is feeling the pressure from the macroeconomic situation and concerns about demand.
For cotton, despite lower production, not just in the U.S. but globally, the downturn in demand will lead to only a modest decline in stocks.
Markets are closely watching for signs of economic recovery and improved demand. Competition from other crops will keep pressure on world cotton area. For example, reports from China indicate a possible shift from cotton to grain production. Farmers in the U.S. will weigh those same decisions, but given the volatility in commodity prices and input prices, I don’t think any decisions are set in stone at this point. Many will take a wait-and-see approach before making final planting decisions.
At current stock levels, short-term optimism for cotton prices is difficult to find. However, as this past year so clearly illustrated, the landscape can and does change quickly. Understanding the current environment and the marketing strategies necessary in today’s market are critical to the economic viability of farming operations.
Thank you again for the opportunity to address the Beltwide conference. Mr. Chairman, that concludes my report.
For 2009, a big question will be the extent to which these problems linger and the potential for recovery. In the next few minutes, I will focus on three issues affecting U.S. cotton’s economic situation: the current demand climate for cotton, the importance of US cotton exports, and the implications of recent movements in energy prices.
Cotton Demand
Cotton demand finds itself facing a very difficult climate. Turmoil in financial markets has restricted credit availability, while the economic downturn and increased job losses have made consumers more cautious in their spending patterns. Also, manmade fibers continue to provide strong competition for cotton.
The effects of the current macroeconomic situation are evident in mill use. USDA’s latest numbers lowered estimates for the ’08 marketing year mill use to 116.6 million bales – down from 123.4 million bales in ‘07. Keep in mind that the 2008 marketing year covers the period from August 1, 2008 through July 31, 2009.
As textile mills face tighter credit conditions and reduced orders from retailers, declines are expected in most countries. China – which accounts for more than 40% of world mill use – is expected to decline for the first time since 1998. The big question is whether the current estimates capture the extent of the decline as some industry estimates are even more bearish.
The latest textile trade data also suggests a slowdown in demand. The United States is the largest retail market for textile and apparel products, and imported products supply more than 90% of US consumer demand. In 2008, imports consistently ran below year-earlier levels. In the previous years, imports were generally running 5% above year-earlier levels.
While the U.S. is the largest importer, China is the largest exporter of textiles and apparel. Last year, growth in China’s exports slowed sharply from the 20-plus percent growth registered between 2005 and 2007.
One of the reasons behind the softer demand situation is the current pessimism in the general economy. In 2008, economic growth slowed in most countries, and recent estimates by the International Monetary Fund call for calendar ‘09 to be worse than ‘08. Developed, or advanced, economies are expected to contract by 3/10 of 1% in 2009. In recent years, these economies have grown by 2 to 3% per year. In developing economies, growth is expected to slow to 5% -- down from the 6 to 8% of the recent past.
Recovery is expected in 2010, but not to recent historical levels. The IMF stresses the uncertainty around the current economic climate, and notes that the projections are based on current policies. The effectiveness of current or future stimulus packages will change the outlook.
For cotton demand, another factor to keep an eye on is the competition from manmade fiber. Cotton continues to face strong competition from polyester. The situation differs somewhat across countries, as evidenced by data for China, India, and Pakistan – which together account for two-thirds of global mill use. Price relationships in these countries illustrate the competitive landscape. In China, internal policies and import controls have generally supported cotton prices at 120 to 130% of polyester prices. In recent weeks, a sharp decline in polyester prices has pushed the ratio above 160%.
Cotton and polyester prices in India are currently at similar levels, as exhibited by the roughly 1-to-1 price ratio of recent months. However, this is a different picture than the previous two years when cotton prices were below polyester prices. In Pakistan, the relationship has been somewhat more stable, with cotton prices being 80 to 90% of polyester prices.
The current USDA estimates translate into a 5.5% decline in mill use from the ’07 level. Since 1972, there have been 4 previous years with declines greater than 2%, and the largest decline was 5.4% in 1974. While this year’s estimated decline is unmatched in recent memory, it is important to note that recoveries in demand have generally been fairly quick and robust.
US Cotton Exports
We are all too familiar with the dramatic shift in demand for US cotton. The US textile industry has been devastated by a surge in imported textile products. As a result, the most consistent and stable customer for US cotton is less than half the size of a decade ago. Fortunately, the losses have slowed, and the much-needed economic assistance provided in the 2008 farm bill should stabilize the industry going forward and allow the US cotton industry to maintain a domestic demand base around 4 million bales.
While US textile mills are critically important to the overall health of the industry, their expected usage totals only 30% of current US cotton production. The remaining 70% of the crop must find a home in the export markets. In recent years, the top three destinations have been China, Mexico and Turkey. For the current marketing year, the slowdown in global mill demand is having a direct impact on US exports. The latest USDA estimate of 12.25 million bales is achievable, but weekly sales and shipments need to improve.
In part, US exports depend on the gap between international mill use and production. Between 1998 and 2006, the gap between the two expanded as growth in mill use outpaced increases in production. The downturn in ’08 mill use has narrowed the gap to just under 12 million bales.
There is a strong correlation between the international deficit and US cotton exports. Between 1998 and 2005, international demand outpaced production, and the differential between the two grew. Over the last couple of years, weakness in demand and better-than-expected international crops have narrowed the gap. Going forward, the US cotton industry will rely heavily on exports. It is in the interest of the industry for the deficit in international markets to grow, and that will largely be dependent on global demand growth.
Energy and Input Prices
The final area to address is something that directly affects the bottom line of farmers – that is the amount paid for inputs necessary to produce your crop. The 2008 crop was the most expensive to produce as crude oil rose above $140 per barrel, which equates to about $3 per gallon. Retail gasoline and diesel prices went above $4 per gallon, with diesel approaching $5 per gallon.
One of the few bright spots in recent months has been the decline in energy prices. Crude oil prices have fallen back in the range of $1.30 per gallon. Likewise, diesel prices have declined to levels more in line with those of 2006 and 2007. Looking at 2009, the latest projections by the Department of Energy call for oil prices to stay near current levels. They project retail diesel prices in the range of $2.50 per gallon, which is quite a bit lower than current levels.
In a similar manner to crude prices, natural gas prices weakened in the second half of last year. DOE calls for prices to hover around $6 per thousand cubic feet in 2009. While the relationship between natural gas and nitrogen fertilizer prices is not as strong as the relationship between crude oil and diesel, recent USDA data indicate that fertilizer prices are softening from the ’08 highs.
Translating input prices into per-acre costs of production is always difficult because of differences in soils, production practices, and management decisions. While individual costs vary dramatically, the average costs of purchased inputs for cotton production in 2008 is estimate at just under $500 per acre – representing a $65 increase from ’07 and more than $100 above 2006.
For this year’s crop, current prices should provide some relief in costs. While costs may not drop back to the 2006 level, a number in the range of 2007 or slightly lower seems very plausible.
The impact of lower oil prices extends beyond the price of inputs. The renewable fuels mandate has created a more direct linkage between oil prices and corn prices. Lower oil and gasoline prices directly affect the price that ethanol plants are able to pay for corn as a feedstock for ethanol production. Separate research at Iowa State University and Purdue University indicate that at current oil prices, the break-even corn price for ethanol plants ranges between $2.50 and $3.50 per bushel. If current oil prices persist, as the Energy Department projections suggest, then grain prices will remain under pressure as well. This will be another factor that farmers must consider as they make this year’s planting decisions.
Summary
As noted at the outset, volatility defined the cotton market in 2008. The move from 90 cents to 40 cents in the December ’08 contract in such a short span of time is unprecedented. In recent weeks, prices have rebounded from the November lows.
At this point, the cotton market, like most commodity markets, is feeling the pressure from the macroeconomic situation and concerns about demand.
For cotton, despite lower production, not just in the U.S. but globally, the downturn in demand will lead to only a modest decline in stocks.
Markets are closely watching for signs of economic recovery and improved demand. Competition from other crops will keep pressure on world cotton area. For example, reports from China indicate a possible shift from cotton to grain production. Farmers in the U.S. will weigh those same decisions, but given the volatility in commodity prices and input prices, I don’t think any decisions are set in stone at this point. Many will take a wait-and-see approach before making final planting decisions.
At current stock levels, short-term optimism for cotton prices is difficult to find. However, as this past year so clearly illustrated, the landscape can and does change quickly. Understanding the current environment and the marketing strategies necessary in today’s market are critical to the economic viability of farming operations.
Thank you again for the opportunity to address the Beltwide conference. Mr. Chairman, that concludes my report.
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1 comment:
Excellent blog post. Continue the good work!
Cotton Exports
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