ICAC Forecasts Higher Prices In 2008
What’s the outlook for cotton in 2007/08?
March 24, 2009
What’s the outlook for cotton in 2007/08? With production projected slightly down and consumption forecast to increase by 3%, a significant decline in stocks-to-mill use ratio could mean higher cotton prices in the coming year. That’s what International Cotton Advisory Committee (ICAC) economist Alejandro Plastina said in October during the ICAC’s 66th Plenary Meeting in Izmir, Turkey.
Giving an outlook to complement the conference’s theme of “Strategies for National Competitiveness,” Plastina explained that Asia was driving the trends in supply and demand with increased mill use and higher production numbers due mostly to improvements in yield. Using a new pricing model developed by the ICAC to forecast cotton prices more accurately, Plastina said the ICAC price model for 2007 predicts a season average of 68 cents, with a 95% confidence range of 61-76 cents. The following excerpts are from Plastina’s report given at the yearly conference in October.
World cotton production followed an almost regular upward trend over the last half century, staying on the same general trend as global cotton mill use. Production expanded from 6.6 million tons in 1950/51 to 27.1 million tons in 2004/05, before declining slightly in following seasons. A focus on the last 25 seasons shows that production stagnated around 20 million tons between 1994/95 and 2003/04, before jumping to 27.1 million tons in 2004/05. Production has since remained above 25 million tons. The higher production levels since 2004/05 are primarily the result of much higher yields, but also benefited from a larger cotton area.
The world average yield rose by 105 kilograms per hectare (16%) in 2004/05 and has not declined since. Cotton yields in many countries are benefiting from the expanded use of existing techniques, such as integrated pest management, better water management, minimum tillage, crop rotations and improved use of fertilizers, as well as new technologies. The most visible of these new technologies is biotech cotton. Biotech cotton is primarily risk and cost reducing, but in some countries it can contribute to increasing yield. It is estimated that 41% of world cotton area will be planted to authorized biotech cotton in 2007/08, up from 37% in 2006/07, contributing to 48% of world cotton production.
Despite the small gain in prices in 2006/07, cotton area is estimated slightly down in 2007/08 to 34 million hectares. Area is estimated up in Asia, including in particular India (+4%) and Pakistan (+6%). However, it declined sharply in the United States (-17%), Turkey (-11%), and the CFA zone (-26%). In the United States and in Turkey, corn was a more attractive alternative to cotton at planting time. In addition, Turkish growers experienced low cotton yields in 2006/07, which discouraged some of them from planting cotton this season. In the African Franc Zone, several seasons of low producers’ prices combined with declining yields have reduced the incentive for many farmers to plant cotton.
Production is expected to decline in many countries in 2007/08. In particular, significant production declines are expected in the United States (-16%), in Turkey (-9%) and in the African Franc Zone (-21%) due mainly to drops in cotton area. However, production in Asia is expected to increase again in 2007/08 to a record of 15.5 million tons. This would represent 59% of projected world production, compared to 56% in 2006/07 and 51% in 2005/06. Most Asian cotton production is located in China (Mainland), India and Pakistan. Projected area and yield increases in India and Pakistan explain most of the forecast production increase in Asia in 2007/08. In particular, both area and yield are expected to reach record levels.
World textile fiber consumption is driven by three major factors: income, population and fiber prices. It is also affected by trade rules and consumer preferences. World cotton mill use increased at an impressive pace from 18.9 million tons in 1998/99 to 26.3 million tons in 2006/07, averaging annual growth of 4% compared to 1% in the previous two decades.
This considerable expansion in mill use has been fueled by strong global economic growth, increases in population, lower prices of cotton relative to other fibers (in particular polyester), and the popularity and greater availability of cotton products vis-à-vis products made of other fibers. In addition, the removal of textile trade quotas agreed under the Multi Fiber Arrangement was completed at the end of 2004. This encouraged further geographical redistribution of textile production to countries with lower production costs, with the effect of lowering textile prices and boosting retail consumption.
Global cotton mill use is expected to continue to increase in 2007/08, supported by economic and population growth, but the increase is expected to be smaller than in recent seasons, owing in part to the expected increase in cotton prices. World cotton mill use is projected to increase by 3% to 27.2 million tons in 2007/08, compared to an annual growth of 6% in 2006/07 and 9% in 2004/05. Asian cotton mill use is expected to continue to increase by 5% in 2007/08 to a record of 20.5 million tons. This would represent 75% of world cotton mill use, up from 74% in 2006/07 and 57% in1998/99.
Once again, most of this increase will be driven by China (Mainland), where mill use is forecast at 11.1 million tons, up 6% from 2006/07 and accounting for 41% of world cotton mill use. Mill consumption of cotton is also expected to increase in India to 4.3 million tons (+8%) and in Pakistan to 2.7 million tons (+3%). Mill use in other Asian countries is forecast stable at 2.4 million tons: increases forecast in Bangladesh, Vietnam and Indonesia are expected to offset projected declines elsewhere.
Cotton mill use is expected to increase in Central Asia, Turkey and South America but to continue declining in the United States and the E.U. The end of the safeguard mechanisms against Chinese imports in the E.U. at the end of 2007 could increase pressure for the local textile industry, but it is not yet clear if this will accelerate the decline in European mill use.
Since 1988 the Secretariat has used a statistical model to forecast the season average Cotlook A Index. This model was adjusted from time to time to reflect changes in the world cotton market, and functioned relatively well until 2003/04. However, this price model did not function as well starting in 2004/05. As of October 16, 2007, the new ICAC price model 2007 predicts a season-average Cotlook A Index of 68 cents per pound for 2007/08, with a 95% confidence interval ranging from 61-76 cents per pound. The main reason for this projected price increase from 59 cents per pound in 2006/07 is the expected decline in the stocks-to-mill use ratio in the World-less-China (Mainland) from 59% in 2006/07 to 51% in 2007/08. This would be the lowest ratio since 2003/04, but the ratio would remain higher than the 25-year average of 45%.
Cotton prices are rising, but not as fast as prices for corn, soybean and wheat. Increasing demand for ethanol pushed corn prices upwards in the past year; prices of soybean, a major competing crop, were affected by the decrease in supply and higher demand. Wheat prices are also increasing this season due to production shortfalls. As a result, in coming months cotton prices are expected to remain less attractive than prices of corn, soybean and wheat. This suggests that despite the expected significant rise in cotton prices this season, plantings in many countries may not increase much in 2008/09. The Secretariat currently projects world cotton area to increase by only 1% in 2008/09. In particular, cotton area is expected to decline further in the United States.