INTRODUCTION – Good morning. Thank you, Mr. Chairman, for the opportunity to present the Council’s economic outlook for U.S. and world cotton. Before I begin, I would like to recognize the Council’s economics staff for their diligent efforts in preparing the outlook. At the conclusion of today’s session, the full report will be available on tables directly outside of this room. In addition, my presentation will be posted on the NCC website.
NEARBY NY AND “A” INDEX – Normally, we begin the economic outlook with a quick review of the underlying assumptions, both for policies and the general economy. However, this year, it’s the price of cotton that has everybody’s attention. We are entering 2011 in an unprecedented price situation. I’m continually adjusting the y-axis to accommodate the current prices. The A Index moved above $2.00 a pound on Wednesday and nearby futures prices are trading in the $1.70’s. We can still remember the time when $1.00 was a seemingly unattainable price.
When the price increase first started, some questioned whether this was 2008 all over again. Well, 2008 is barely a blip on the chart at this point. However, cotton’s price run over the past two years is not too dissimilar to the run-up that occurred for grains and oilseeds between 2006 and 2008.
US STOCKS/USE VS NY FUTURES – The current price situation has support from the fundamentals. Based on USDA’s monthly supply & demand estimates, stocks tightened dramatically by the end of the 2009 marketing year. Current USDA estimates for the ‘10/11 marketing year put the stocks/use at 10%. USDA’s current US ending stock number is the lowest, at least in the past 50 years. Global stocks have tightened as well.
COTTON PRICES – One final point to make on the current price situation is to highlight relative prices in 2 key markets. Cotton prices have increased in all markets but not to the same extent. China’s cotton prices normally trade at a premium relative to the A. For example, the type 328 price runs 15-20 cents above the A. As the 2010 marketing year began, that gap expanded to 40 cents. By December, measures taken in China to cool inflation brought their internal price back to 15 cent premium relative to the A – a premium that in part still reflects their import controls. The more interesting developments are in India, where the Shankar-6 variety historically trades at a discount of 5-7 cents relative to the A. However since the middle part of 2010, that discount has expanded as the Indian government operates various export controls. Currently, they are operating under an export quota of 4.3 million 480lb bales that went into effect on October 1. It’s unclear if the full quota will be exported or if additional quota will be allocated. In recent weeks, India’s price is 50 cents below the A Index and 70-75 cents below China’s internal prices. Think about that last statement for just a second. The difference between 2 cotton prices was 75 cents – not the actual price is 75 cents but the difference between 2 prices is 75 cents. Perhaps, that more than anything highlights the challenges with trying to figure out this market.
INTERNATIONAL AREA – Economists build models and look for relationships between data – relationships that fit the theories learned in economics classes. However, those models are going to be based on observed historical data. Are those models still relevant when we’ve moved to completely different price levels?
INTERNATIONAL COTTON AREA – The question is not ‘if cotton area will increase’ but rather ‘how much will area increase.’ The Council’s outlook calls for cotton area outside of the US to reach a new high of 76 million acres, surpassing last year’s number by roughly 4.5 million acres and besting the previous high of 75.2 million in 2004.
INTERNATIONAL COTTON AREA – Looking at a breakdown by key countries and regions, we expect the magnitude of the increase to vary somewhat. In China, stronger prices are expected to push area to 13.2 million acres. However, competition from food crop production will limit the increase in the range of 4-5%. In India, cotton area has consistently been on the increase for the better part of the past decade, almost without regard to whether cotton prices have been high or low. In part, past increases reflect the additional profitability as cotton yields have improved. For 2011, we believe that India will increase area again, but by a relatively modest 3%. Thinking back to the price chart, India’s cotton prices are stronger, but the increase is not as strong as we’ve seen on the international market. In the Southern Hemisphere, the crop is planted in the latter part of the calendar year. With high prices this past fall, plantings for the ’10 marketing year jumped by more than 2 million acres. Looking ahead to the fall of this year, we don’t expect much change and based on current futures price expectations in late 2011 and early 2012, cotton area could lose out to soybeans and grains. Across the remaining countries – largely dominated by Pakistan, Central Asia, and West Africa – we expect area to increase by more than 10%. Stronger prices, a recovery from the floods in Pakistan, additional credit in West Africa will lead to the increase.
INTERNATIONAL COTTON PRODUCTION – Assuming yields in line with recent trends, international production reaches 104.1 million bales, more 7 million bales above the ’10 crop and a new record.
INTERNATIONAL COTTON PRODUCTION – Going back to the same breakdown of countries and regions, China’s crop is forecast at 32.3 million bales, India at 27.2 million bales, Southern Hemisphere at 13.4 million bales, and all remaining countries at 31.2 million bales.
INTERNATIONAL MILL USE AND TRADE – Now, let’s turn our attention to the demand side. Frankly, in the current price environment, this may the most interesting side of the balance sheet.
FIBER PRICES – One concern is the competition from manmade fibers. Can we continue to grow demand with the “A” Index roughly double the Asian polyester price? At this point, the answer appears to be yes, but anecdotal evidence indicates that growth is being limited by some switching to MMF.
FIBER AND YARN PRICES – Another aspect to watch is the ability of yarn spinners to pass along the higher fiber prices to downstream users. Through November 2010, yarn prices increased in a similar fashion to fiber prices, suggesting that yarn spinners were able to maintain some margin. However, since that time, cotton prices have advanced at rates not matched by yarn prices.
WORLD REAL GDP GROWTH – The cotton market has witnessed the effects caused by upheaval and uncertainty in the general economy. The recession brought a sharp drop in cotton demand. The global economy rebounded in 2010 with the International Monetary Fund (IMF) putting global growth at 5%. However, in their latest outlook, the IMF refers to the current recovery as a “two-speed” recovery. Growth in developed economies is rather anemic, and high unemployment remains a problem that is not expected to change much over the course of 2011. In developing countries, economic growth is relatively strong, and there are even concerns of inflation and over-heating. For 2011 and 2012, the IMF calls for growth of 4.4 and 4.5%, respectively.
SHARE OF WORLD GDP – For cotton demand, the growth will come from developing Asia. GDP growth in those countries has been outpacing all other regions of the world, as evidenced by their increasing share of world GDP. The same is expected for ’11 and ’12.
INTERNATIONAL MILL USE – Taking into consideration these factors, we expect cotton demand will expand in the 2011 marketing year, with international mill use at 117.3 million bales, up from 113.2 million bales in the current marketing year. The ’11 projection falls short of the highs reached in 2006 and 2007.
INTERNATIONAL MILL USE – Looking at key countries, we will focus on the ‘Big 3.’ As usual, China is a bit of a conundrum. For 2010, USDA is calling for a down-turn in China’s mill use, but that is certainly not showing up in their monthly yarn production numbers. Perhaps, cotton is losing market share relative to polyester. However, while our outlook also lowers China’s ’10 mill use, we do not go as low as USDA. Growth will return in the ’11 marketing year as China’s economy expands and retail demand in China grows. India has been and will continue to expand mill use. There are reports of additional investment in spinning equipment. Their mills currently enjoy a price advantage relative to the rest of the world. Growth is also expected in Pakistan.
COTTON IMPORTS – Since most importing countries will end the ’10 marketing year with very tight stocks, any demand growth that exceeds their own domestic cotton production will require additional imports. For the upcoming marketing year, total imports are forecast above 42 million bales, the second highest on record after 2005. China’s the key player, accounting for roughly 40% of world imports. China is expected to import 17 million bales in the ’11 marketing year. Other countries are expected to increase as well.
INTERNATIONAL COTTON EXPORTS – The next question is who will supply those imports. As a general rule, increased international production will lead to additional export competition for the United States. This is true in West Africa, Central Asia, and most other countries. In this outlook, the exception to that is India. Given their recent and ongoing practice of limiting cotton exports, we assume that some type of restrictions will continue into the 2011 marketing year. With growth expected in their production and mill use, the relative balance between internal supply and demand is similar to the current year, and likewise, we assume that exports from India will also remain stable when compared to the current marketing year.
US COTTON EXPORTS – Currently, export sales are at record pace and shipments have improved. Despite the increased competition, our outlook calls for US exports to reach 15.6 million bales in the 2011 marketing year, up from 15.3 million bales in 2010. I would also note that our estimate for the current year is slightly below USDA’s estimate, simply based on the anticipated tightness in the market and whether or not all of cotton will be shipped by July 31 in order to reach the USDA total.
US MILL USE – Next, let’s turn our attention to cotton demand by US textile mills.
UPLAND COTTON EAAP – Certainly, the current price situation is creating challenges for the US textile industry, but the overall mood remains relatively positive as yarn demand has been on the upswing. Another positive for the textile industry has been the Economic Adjustment Assistance Program created in the 2008 farm bill. All indications are that the program has been a success and is working just as intended. Based on feedback from the textile industry, the funds delivered by the 4-cent payment have purchased new textile machinery, new buildings and allowed structural improvements to existing buildings. The result is new jobs, reduced costs, and an increased ability to be more competitive against foreign competition.
US COTTON MILL USE – The program, coupled with an improved demand climate, has allowed mill use to recover with monthly numbers running 10% higher than year-ago levels. For the current marketing year, we estimate mill use at 3.7 million bales and expect mill use of 3.8 million bales for the ’11 marketing year.
US COTTON PRODUCTION – Now, we can turn our attention to what you’ve really been waiting to hear – the Council’s expectations for 2011 US acreage and production.
DECEMBER COTTON FUTURES – Just to quickly review the market situation heading into the planting season, the December 11 contract is running approximately 50 cents above last year’s contract. Growers are approaching this year’s crop with the harvest-time contract trading at an all-time high for this time of year. Growers have the opportunity to price their crop for as much as $1.15 per pound.
DECEMBER CORN FUTURES – Of course, if cotton is to increase acreage, then it must pull those acres from another crop, and in most cases, prices of competing crops are also substantially above year-ago levels. That is the case for with the December ’11 contract at $6.00 per bushel, as compared to $4.00 at this time last year.
NOVEMBER SOYBEAN FUTURES – A similar story holds for soybeans with November ’11 beans above $13.50. By comparison, last year’s price was $9.00 per bushel. Growers will weigh relative market prices, along with costs of production and agronomic considerations when making their final planting decisions.
NCC PLANTING INTENTIONS SURVEY – As in past years, the Council’s acreage estimate is determined by our early season planting survey. As a reminder, the Council’s survey is distributed to all cotton farmers, either through regular mail or email. In this year’s survey, the traditional mail version came on blue cards, and producers were asked to provide the following information: their actual 2010 acreage of cotton and competing crops, along with their intended acreage for cotton and competing crops in 2011. Growers can respond by returning the card via regular mail or by entering their information on the provided website. Each card has the state code, or in the case of Texas, a sub-state code so that we know the location of the respondent.
NCC PLANTING INTENTIONS SURVEY – Now, let’s look at this year’s results. In 2010, farmers planted 10.769 million acres of upland cotton and 204 thousand acres of ELS.
NCC PLANTING INTENTIONS SURVEY – Based on the responses to the Council’s survey, cotton farmers indicate that they will plant 12.263 million acres of upland cotton and 251 thousand acres of ELS cotton. The combined total is 12.514 million acres, which is an increase of 14% relative to 2010.
2011 SOUTHEAST ACREAGE – All of the state-level numbers can be found on page 46 of the report available at the close of this session. Beginning with the Southeast, survey results indicate a 12.8% increase in the region’s upland area to 2.9 million acres, with all states increasing cotton acreage. In percentage terms, Virginia and North Carolina lead the way with increases of 26.9% and 26.1%, respectively. In both states, increased cotton acres are coming at the expense of corn and soybeans. Growers in Florida report a planned increase of 18.3%, while increases in Alabama and South Carolina are 14.0% and 11.2%, respectively. In Alabama and Florida, cotton is the beneficiary of acres moving out of peanuts, while the South Carolina increase coincides with planned acreage reductions in corn and soybeans. Georgia, the largest cotton state in region, reports the smallest increase at 6.0%. The increase is primarily due to a shift of acres from peanuts. Total 2011 acreage for each of the states is as follows: Alabama at 388 thousand acres, Florida at 109 thousand, Georgia at 1.41 million, North Carolina at 694 thousand, South Carolina at 225 thousand, and Virginia at 105 thousand.
2011 MID-SOUTH ACREAGE – In the Mid-South, survey results show that growers intend to plant 2.28 million acres, an increase of 18.9% from the previous year. While all states in the region indicate more acres of cotton, the magnitudes vary from an increase of 8.0% in Arkansas to a 39.5% increase in Tennessee. Mississippi’s survey results indicate an increase of 24.8%, while Missouri and Louisiana are up by 12.4% and 8.9%, respectively. In each of the five states, the survey suggests that cotton will be pulling acres away from soybeans, while growers in Mississippi, Missouri, and Tennessee also plan to reduce acreage devoted to corn. Total 2011 acreage for each of the states is as follows: Arkansas at 589 thousand acres, Louisiana at 278 thousand, Mississippi at 524 thousand, Missouri at 348 thousand, and Tennessee at 544 thousand.
2011 SOUTHWEST ACREAGE – Growers in the Southwest are planning to bring 700 thousand acres into cotton production, bringing the regional total to 6.59 million acres (+11.9%). In percentage terms, Kansas leads the region with an increase of 34.6% as the survey shows wheat and soybean acres being planted to cotton in 2011. Acreage in Oklahoma is showing a 14.4% rebound, again largely at the expense of wheat. For Texas, survey respondents intend to expand area by 11.5%. Total 2011 acreage for each of the states is as follows: Kansas at 69 thousand acres, Oklahoma at 326 thousand, and Texas at 6.19 million acres.
2011 WEST ACREAGE – All states in the West region show increases in upland plantings, with the region as a whole up 27.0%. In Arizona, intended area of 226 thousand acres represents a 15.8% increase from the previous year. The expected increase in acreage is coming in response to better price signals and less competition from feed crops and specialty crops. At the time of the survey, California farmers intend to plant 172 thousand acres (+38.8%), with the increase coming at the expense of specialty crops. New Mexico is reporting intentions of 67 thousand acres, up 42.5% from 2010.
2011 ELS ACREAGE – In response to strong market signals, survey results indicate that U.S. cotton growers intend to increase ELS plantings 23.1% to 251 thousand acres in 2011. Each of the 4 ELS-producing states is indicating more acres with California planting 225 thousand acres, or 23.6% more than last year. In Arizona, a 47.2% increase brings area up to 3,700 acres. In New Mexico, growers intend to plant 3,500 acres (+28.2%), while Texas acres are estimated at 19,300 (+13.7%).
2011 US PLANTING INTENTIONS – Summing together the regional upland and ELS cotton intentions shows U.S. all-cotton plantings in 2011 of 12.51 million acres, 14.0% higher than 2010. As a side note, there are a couple of interesting results from the survey that are worth noting. First, this is a solid increase in acres, but not what I would a call fence row-to-fence row increase. For example, not all responses indicated higher acres. In fact, about 18% of respondents said they intend to plant less cotton. Of course, the flip side to that is that 82% plan to increase or maintain cotton acreage. Also, the survey did show that some producers are coming back to cotton after having not planted any cotton in 2010. Roughly 5% of survey respondents indicate that they will plant cotton in 2011 after not planting cotton last year.
INDEXED FUTURES PRICES – We always remind you that the survey is a snapshot of intentions at the time the survey was conducted. The survey was distributed on December 15 and responses were collected through January 18. If we index futures prices back to December 15, you notice that futures prices for cotton, corn and soybeans generally increased in similar magnitudes throughout the survey period. However, since that time, cotton prices have gained relative to corn and soybeans. The big question will be the extent to which prices change in the coming weeks.
US COTTON PRODUCTION – To arrive at a production estimate, yields for each state are aligned with recent trends and abandonment rates (or the percent of acres un-harvested) are set at historical averages. Based on the state-level numbers, the US average yield is 826 pounds and the abandonment rate is 11%. When applied to planted acres of 12.51 million acres, the US crop is estimated at 19.2 million bales. This breaks down into 18.5 million bales of upland and 671 thousand bales of ELS production.
US COTTONSEED PRODUCTION – Assuming an average seed-to-lint turnout ratio gives cottonseed production of 6.5 million tons, as compared to 6.2 million tons last year.
US BALANCE SHEET – Finally, in summarizing the US balance sheet, the production and demand numbers have already been covered. One important point to note is that the combined offtake is 19.4 million bales, exceeding expected production by 200 thousand bales. As a result, US stocks are expected to be as tight, if not tighter, at the close of 2011 marketing year when compared to 2010.
WORLD BALANCE SHEET – For the world balance sheet, global production is forecast at 123.2 million bales with mill use at 121.1 million bales. That leads to slight increase in ending stocks for the 2011 marketing year.
WORLD STOCKS-TO-USE – In terms of stocks-to-use ratios, the balance sheet gives a stocks-to-use ratio of 37%, essentially unchanged from ’09 and ’10.
NATIONAL COTTON COUNCIL – Relative to recent history, the Council’s economic outlook calls for the overall cotton supply and demand situation to remain tight for the coming year. While the NCC does not project prices, the overall cotton balance sheet, coupled with continued pressure from competing crops, is consistent with cotton prices above historical norms. In the current environment, volatility will tend to be the rule rather than the exception as markets will be more sensitive to unexpected shocks. Of course, as with any outlook, there are a number of risks and uncertainties. A key issue to watch going forward will be the ability to sustain cotton demand in the prevailing market conditions, particularly given the fragile nature of the macroeconomic recovery.
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