Monthly Economic Outlook

U.S. and World Cotton Economic Outlook

Prepared by:
Economic Services - National Cotton Council
February 2019

TO CONVERT BALES TO METRIC TONS:
number of bales / 4.59

TO CONVERT ACRES TO HECTARES:
number of acres * 0.40469

 MACROECONOMIC ENVIRONMENTLet’s begin with an overview of the state of the general economy.

 

U.S. REAL GDP According to the latest estimates released by the Bureau of Economic Analysis, real GDP increased at an annual rate of 4.2 percent in the second quarter of 2018. Estimates from the Bureau of Economic Analysis show an increase of 3.4 percent in the third quarter of 2018. 

 

OK-WTX CRUDE OIL SPOT PRICE – Since the beginning of the year, prices have fluctuated between $46.31 and $55.29 per barrel.    

 

#2 DIESEL FUEL RETAIL PRICE – Diesel prices have followed the same trend as that of crude oil prices.  The price for #2 diesel fuel at the beginning of February was roughly $1.87 per gallon.

 

UNEMPLOYMENT RATEThe unemployment rate was 4.0% for January, up slightly from the previous month’s unemployment rate.

 

FEDERAL BUDGET SURPLUSThe latest projections by the Congressional Budget Office (CBO) show deficits continuing for the next several years.  For fiscal ’18, CBO projects a deficit of roughly $779 billion.  Deficits persist through 2022.

 

CBO AG BASELINE SPENDING Looking at fiscal 2018 through 2020, commodity programs are expected to cost between $5.3 and $9.7 billion per year, with conservation programs adding an additional $4.7 to $5.7 billion per year.  Within commodity support, cotton outlays average about $332 million per year.

 

WORLD REAL GDP GROWTHThe International Monetary Fund estimates that the world economy grew 3.8% during the course of 2017.  China’s economy was expected to increase 6.9% in 2017.  Estimates for India show GDP growth of 6.7% for 2017. For 2018, the world economy continued to grow at 3.7%.  China’s economy is expected to climb 6.6% in 2018 while estimates for India also show GDP growth of 7.3%.  For 2019, world GDP continues to climb at a rate of 3.5 % while the U.S., Indian and Chinese economic sectors are expected to continue to grow.

 

PERCENT CHANGE IN VALUE OF U.S. DOLLAR -   Currently, the euro is averaging 0.88 per dollar.   

 

EXCHANGE RATE INDEXThe Federal Reserve Board publishes a real exchange rate index comparing the dollar to a weighted average of currencies of important trading partners, excluding major developed economies.  Mexico carries the largest weight, followed by China, South Korea and Taiwan. The index showed a dramatic strengthening of the dollar in 1998 due to currency devaluations associated with the Asian financial crisis.  In early 2001, the index sat at just under 118.  The index peaked at roughly 124 in 2003, but now sits at roughly 111.

 

AG PRICES RECEIVEDThe U.S. Department of Agriculture (USDA) publishes indices of prices received by farmers.  The latest index of crop prices is 84.1.  The index of livestock prices now stands at 92.1.

 

NET FARM INCOMENet farm income, a broad measure of profits, is forecast to decrease $9.1 billion (12.1 percent) from 2017 to $66.3 billion in 2018, after increasing $13.8 billion (22.5 percent) in 2017. Net cash farm income is forecast to decrease $8.5 billion (8.4 percent) to $93.4 billion.

 

U.S. COTTON SUPPLYHaving set the stage for the overall economy, let’s turn our attention to the U.S. cotton sector.

 

DEC COTTON FUTURES As of early February, the December 2019 contract was trading at $0.74 per pound, down 1-2 cents from year-ago levels.

 

DEC CORN FUTURESCorn prices declined throughout most of the 2018 marketing year but have been improving in the past few months. As of early February, the December 2019 contract for corn was trading at $4.02 per bushel, which is about 12 cents/bu. higher than a year ago.

 

NOV SOYBEAN FUTURES - Soybean prices, as measured by the Chicago Board of Trade November futures contract, have decreased relative to year-earlier levels. By early February, the November 2019 contract traded at $9.59 per bushel, approximately 42 cents lower than the November 2018 contract was trading a year earlier.

 

U.S. COTTON ACREAGEAccording to the National Cotton Council’s Annual Early Season Planting Intentions Survey, producers intend to plant 14.45 million acres, up 2.9% from 2018. Upland planted area is estimated to increase 2.8% to 14.19 million acres. ELS cotton producers intend to plant 264,000 acres, up 6.3%.

 

U.S. COTTON PRODUCTION – In its February report, for 2016, the USDA forecast U.S. production at 17.2 million bales.  An increase of roughly 3.8 million bales is projected for the 2017 crop with production rising to 20.9 million bales.  U.S. production is estimated to be roughly 18.4 million bales for 2018/19.

 

U.S. COTTON SUPPLYIn the February report, USDA estimates production at 17.2 million bales and beginning stocks of roughly 3.8 million for the 2016 crop year.  Combined with imports this gives total supplies of roughly 21.0 million bales for the 2016/17 marketing year.

 

By adding beginning stocks of 2.8 million bales to the 20.9 million bale crop, USDA believes total U.S. supply will rise roughly 2.7 million bales to 23.7 million bales in 2017.

 

For the 2018 crop year, combining projected production of 18.4 million bales with expected beginning stocks of 4.3 million bales results in a total U.S. supply of 22.7 million bales. This is down roughly 970,000 bales from the 2017 level.

 

U.S. COTTON DEMANDMoving along, we’ll focus on U.S. cotton demand.

 

U.S. RETAIL FIBER CONSUMPTIONNet domestic consumption is a measure of the size of the U.S. retail market. It measures both cotton spun in the U.S. (mill use) and cotton consumed through textile imports. Net domestic consumption of cotton in 2018 is estimated to be 18.3 million bale equivalents. For 2019, NCC projects net domestic consumption of cotton to increase to 18.7 million bales.

 

U.S. RETAIL COTTON CONSUMPTION (MONTHLY) – The U.S. retail market reached 17.7 million bales of cotton textile products for calendar 2017.  Data through November shows us running ahead of last year.  

 

U.S. RETAIL COTTON CONSUMPTION (HISTORICAL) - Imported goods make up the largest portion of U.S. net domestic consumption. Imported cotton textiles increased from 17.9 million bale equivalents in 2017 to an estimated 18.6 million in 2018.

 

U.S. COTTON TEXTILE IMPORTS - Imports of cotton goods in calendar 2018 were estimated to have increased by 3.3% to 18.6 million bale equivalents. In calendar 2019, NCC projects cotton textile imports to increase to 18.9 million bales.

  

U.S. COTTON CONTENT - For textile imports, it is important to consider that a significant portion of imported goods contain U.S. cotton. Since much of what the U.S. exports to the NAFTA (North American Free Trade Agreement) and the CBI (Caribbean Basin Initiative) countries is in the form of fabric and piece goods that come back in the form of finished goods, the trade gap is not as wide as implied by gross imports and exports. NCC analysts estimate that 25.5% of all cotton goods imported in 2018 contained U.S. cotton. This is a 0.7% decrease over the previous year. In bale equivalents, these imported cotton goods contained 4.7 million bales of U.S. cotton. This is due, in large part, to our trading partners in NAFTA and the CBI.

 

COTTON TEXTILE TRADE WITH MEXICO - Imports from Mexico in 2018 were estimated at 971 thousand bales, up approximately 5.5% from the previous year.

 

COTTON TEXTILE TRADE WITH CBIImported cotton goods from CBI for the year were estimated at 2.2 million bale equivalents, down 4.3% from the previous year.

 

COTTON TEXTILE IMPORTS FROM CHINA- Total cotton product imports from China increased to an estimated 6.0 million bale equivalents in 2018, up 7.2% from 2017 and up by more than 630% from 2001 when China entered the WTO. China’s share of imported cotton goods in the U.S. market accelerated from 10.9% in 2004 to an estimated 32.5% in 2018.

 

CALENDAR MILL USE Cotton mill use decreased from the previous year and is estimated at 3.2 million bales in calendar 2018, 0.9% below 2017. For calendar 2019, NCC forecasts domestic mill use of cotton at 3.4 million bales.

 

CROP YEAR MILL USEUSDA’s latest estimate for mill use in the 2016 crop year is 3.25 million bales. The USDA estimates 2017 crop year mill use at 3.23 million bales. For 2018, USDA projects domestic mill use of cotton at 3.20 million bales.

 

U.S. COTTON PRODUCTION & USE - Looking at the 2016 crop year, USDA estimates exports at roughly 14.9 million bales while U.S. production is estimated at 17.2 million bales and mill use is estimated to be 3.3 million bales.  For 2017, exports rise to 15.9 million bales while mill use is expected to remain basically unchanged at 3.2 million bales.  Production is expected to rise.  USDA estimates U.S. production to be 20.9 million bales for 2017/18. For 2018, mill use falls to 3.2 million bales while production falls to 18.4 million bales and exports are expected to slip to 15.0 million bales.

 

WORLD MARKET Exports of U.S. cotton will be dependent on conditions in the world market.

 

CHINA COTTON SUPPLY & USEFor China, production is estimated to be 22.8 million bales for the 2016 crop year.  In terms of consumption, one of the big questions will be the factors driving China’s mill use.  Much of the growth has been fueled by the push to increase textile exports, and they will continue to be a significant exporter of textiles.  However, over the past couple of years, it’s becoming more evident that growth in their own consumer demand for cotton textiles is also driving the textile industry.  Assuming this trend will continue, mill use is projected to be roughly 38.5 million bales.  For 2017, production will increase to 27.5 million bales while mill use climbs to 41.0 million bales. For the 2018 crop year, USDA projects production to remain unchanged at 27.5 million bales while mill use dips to 40.5 million bales. 

 

WORLD COTTON PRODUCTION - USDA estimates put the 2016 crop at 106.7 million bales and roughly 123.7 million bales for the 2017 crop.  USDA estimates for 2018/19 show world production at roughly 118.5 million bales.      

 

WORLD FIBER DEMANDThe competition from man-made fiber is getting stronger all of the time. According to PCI, the use of polyester has surpassed cotton, and for 2010, consumption approached 170 million bales. This is over 54 million bales above their estimate of the consumption of cotton.  For 2018, PCI estimates polyester consumption to rise to approximately 247 million bales.

 

FIBER PRICES – Cotton prices have worked their way back to and above the level of manmade fiber prices.     

 

WORLD COTTON MILL USE In its February report, USDA estimates 2016 world mill use at 116.2 million bales and 122.6 million bales for the 2017 crop year.  For crop year 2018 mill use is set at roughly 123.6 million bales.    

  

FOREIGN PRODUCTION & USEThe gap between foreign production and use influences our ability to export cotton.  In 2016, production was estimated at 89.5 million bales and mill use at 112.9 million bales.  For the 2017 crop year, production is estimated at 102.8 million bales and mill use at 119.4 million bales.  For the 2018 crop year, production is estimated at 100.1 million bales and mill use at 120.4 million bales.

 

U.S. COTTON EXPORTS According to USDA, the U.S. exported 14.9 million bales in the 2016 crop year.  In 2017, exports rose to 15.9 million bales.  For 2018, exports slipped to an estimated 15.0 million bales.   

 

WORLD ENDING STOCKS - World stocks on July 31, 2017 are estimated to reach 80.4 million bales. While there are a host of uncertainties that can lead to major changes in the balance sheet, not the least of which is weather, the current estimates still leave us with a lot of stocks to work through the system. According to USDA, stocks were roughly 81.1 million bales by the end of the 2017 marketing year.  By the end of the 2018 marketing year, stocks are estimated to fall to 75.5 million bales. 

 

COTTON STOCKS/USEAnother way to look at the stocks situation is to focus on the stocks/use relationship for the world less China.  For the 2003 marketing year, that ratio was estimated to be 44%. The larger ’04 crop pushed that ratio back up to 60%. The ratio was estimated at 55% for the 2005 marketing year and 57% for 2006.  For 2007, the ratio was estimated to remain unchanged at 57%.  In 2008, the stocks-to-use ratio was somewhere around 60% and 46% in 2009.  For 2010, the stocks-to-use ratio was estimated to climb to 56%.  For the 2011 marketing year, the ratio was estimated to climb to 62% and fell to 54% in the 2012 marketing year. The stock-to-use ratio dropped to 49% through the 2013 marketing year. For 2014, the ratio was estimated to climb to 52%. The ratio is estimated to fall to 44% in 2015 and remain at 44% in 2016.  For 2017, the stocks-to-use ratio is forecast to climb to 53% and fall slightly to 52% for 2018.

 

U.S. SUPPLY & DEMANDIn its February report, U.S. production is estimated to be 20.9 million bales for 2017/18. Mill use is estimated at 3.2 million bales while exports are reported to be 15.9 million bales. The estimated total offtake stands at 19.1 million bales. With beginning stocks of roughly 2.8 million bales, this would result in U.S. ending stocks of 4.3 million bales on July 31, 2018, and a stocks-to-use ratio of 22.5%.

 

For the 2018 crop year, U.S. production is estimated to be 18.4 million bales. Mill use is forecast at 3.2 million bales while exports are forecast to be 15.0 million bales. The estimated total offtake stands at 18.2 million bales. With beginning stocks of 4.3 million bales, this would result in U.S. ending stocks of 4.3 million bales on July 31, 2019, and a stocks-to-use ratio of 23.6%.

 

WORLD SUPPLY & DEMANDIn USDA’s February report, world production is estimated at 123.7 million bales for the 2017/18 crop year.  Mill use is set at roughly 122.6 million bales. With beginning stocks of 80.4 million bales, this would result in world ending stocks of roughly 81.1 million bales on July 31, 2018, and a stocks-to-use ratio of 66.1%.

 

World production is estimated at 118.5 million bales for the 2018/19 crop year.  Mill use is forecast at 123.6 million bales. With beginning stocks of 81.1 million bales, this would result in world ending stocks of 75.5 million bales on July 31, 2019, and a stocks-to-use ratio of 61.1%.