Monday, November 28, 2022

Reflect & Project

The 2021 Economic Outlook For U.S. Cotton

• By Jody Campiche, Shawn Boyd and Michelle Huffman •

Editor’s Note: During the 2021 National Cotton Council Annual Meeting, NCC Economic Services presented the economic outlook for the U.S. and world cotton market. Here are excerpts from their report.

texas cotton
Photo by Vicky Boyd

This past year was characterized by significant uncertainty and volatility in both the global economy and the world cotton market. The most challenging issue facing the global cotton market in 2020 was the COVID pandemic.

It caused unprecedented disruptions in the supply chains and markets for the U.S. and world cotton and textile industries as retail outlets shuttered their doors for months. The COVID pandemic resulted in a contraction in the U.S. and world economy in the first half of 2020 followed by a partial recovery in the second half of the year.

In early 2021, world mill use appears to be recovering at a faster rate than originally expected following an 18 million bale decline in the 2019 crop year. A recovery in demand, along with increased purchases of U.S. cotton as part of the U.S.-China Phase I agreement, has allowed the U.S. share of Chinese imports to rebound to the level prior to the trade dispute.

World Mill Use Recovering

Because of the pandemic, the U.S. Department of Agriculture made a significant reduction in 2019 crop year world mill use between its March and May estimates.

Looking back to its initial estimate in May 2019, USDA was projecting world mill use of 126 million bales. World consumption of 102 million bales for the 2019 crop year was the lowest level since 2003 and 18 million bales lower than in 2018.

While a recovery in mill use is occurring during the 2020 crop year, ongoing COVID disruptions have resulted in a 2020 estimate below pre-pandemic levels. In the latest USDA report, 2020 world consumption was increased to 117.2 million bales, mostly due to a 1 million bale increase in China, along with smaller increases in India and Pakistan.

NCC Acreage Survey

Projections for the 2021 marketing year will begin with the outlook for U.S. production. As in past years, the prospects for the U.S. crop are based on the results of the NCC planting intentions survey with assumptions made for abandonment and yields.
Surveys were distributed Dec. 15, 2020, and responses were collected through mid-January. Respondents are asked to give their plantings of cotton, corn, soybeans, wheat and other crops for 2020 and intended acreage for 2021.

It is important to remember that the survey is a snapshot in time based on grower intentions. Changes in markets and weather will cause actual plantings to differ from early season intentions.

As we look ahead to projected prices for the 2021 crop year, cotton harvesttime futures contracts as of early February were trading at much higher levels than last year. Competing crops prices are also above year-ago levels, with soybean prices showing the most significant increase.

During the survey period, the cotton-to-corn price ratio was higher than in 2020 while the cotton-to-soybean price ratio was lower. It is important to call attention to the ratios because experience has shown that they are reliable indicators of changes in cotton acreage.

In the Southeast, survey results indicate a 4.2% decrease in the region’s Upland area to 2.3 million acres.

In the Mid-South, growers have demonstrated their ability to adjust acreage based on market signals. The relative prices and potential returns of competing crops play a significant role in cotton acreage.

Mid-South growers intend to plant 1.7 million acres, a decline of 3.7% from the previous year. Survey results suggest that the decrease in cotton acres can be attributed to a shift to corn and soybeans.

Growers in the Southwest intend to plant 7.1 million acres of cotton, a decrease of 5.5%. Increases in cotton area is expected in Kansas, and a decline is expected in Oklahoma and Texas.

With intentions of 197,000 acres, producers in the West expect to plant 2.5% fewer acres of Upland cotton. Overall, the survey indicates that growers also intend to plant less extra-long staple cotton in 2021 for a total of 161,000 acres.

The total of Upland and ELS cotton intentions shows U.S. all-cotton plantings in 2021 of 11.5 million acres, 5.2% lower than in 2020. Between now and planting time, changes in relative market prices and weather developments can alter final decisions, but we think these survey results provide an accurate picture of overall intentions.

U.S. Cotton Production

With average abandonment for the United States estimated at 18.1%, Cotton Belt harvested area totals 9.4 million acres. Using an average 2021 U.S. yield of 855 pounds per acre generates a cotton crop of 16.7 million bales, with 16.3 million bales of upland and 431,000 bales of ELS.

cotton belt mapThe USDA estimate for 2020 cottonseed production was 4.6 million tons, down 1 million tons from the previous year. For the 2021 crop year, cottonseed production is projected to increase to 5.2 million tons.

Turning attention to the U.S. balance sheet, projected U.S. production of 16.7 million bales is 1.7 million bales higher than 2020.

Domestic Mill Use

NCC projects a partial recovery in domestic mill use of cotton at 2.8 million bales for the 2021 marketing year.

As one of the largest users of U.S. cotton, U.S. mills continue to be critically important to the health of the cotton industry. In the face of rising textile imports from Asian suppliers, the U.S. textile industry has focused on new investment and technology adoption to remain competitive.

World Imports And Exports

Now, let’s transition to the world market to determine the outlook for U.S. cotton exports.

In the most recent monthly estimates, USDA increased China’s production, mill use and imports for the 2020 crop year. With a smaller crop expected in 2021 and continued growth in mill use, China is expected to increase imports to 11.5 million bales in the 2021 crop year.

However, the outlook regarding China will be affected by major policy developments. One is the continued implementation of the Phase I agreement, and the second is the U.S. government’s increased focus on addressing forced labor issues in the Xinjiang region, where most of the cotton is produced.

The most recent Withhold Release Order issued for cotton and all products from the Xinjiang region will likely have a significant impact on the global cotton textile and apparel supply chain. As of early February, the full impacts of these new restrictions on the world cotton market are unclear.

globeBangladesh and Vietnam continue to increase imports as their textile and clothing industry expands. India’s imports are expected to decline in 2020 and 2021. The Indian government recently announced a 10% duty on cotton fiber imports to potentially support local prices amid higher domestic production.

Pakistan continues to be a large importer of cotton. This is a result of lower production and strong demand for better grades of cotton for blending and producing export-oriented quality textile products.

With expanding cotton acreage in Brazil, a slight rebound in Australia’s production, and increasing stocks in India, the United States will continue to face strong export competition in the 2021 crop year and in the foreseeable future. Brazil continues to make improvements to infrastructure allowing for more efficient transportation of cotton.

Despite the challenges in 2020, the United States did have increased opportunities for export sales to other markets in the 2020 crop year, particularly in Pakistan and Turkey.

During the 2020 crop year, the Indian government increased purchases of Indian cotton under the Minimum Support Price program, resulting in less cotton available to export. The management of stocks by the Indian government will be a major factor to watch in 2021.

Uzbekistan has drastically reduced cotton exports in recent years and was aiming to use all local cotton production domestically as early as the 2020 marketing year. A further expansion of its textile industry will require Uzbekistan to increase cotton production or become a cotton importer. This is an interesting dynamic since Uzbekistan has not previously imported raw cotton.

U.S. Balance Sheet

When combining the net trade changes of other countries, U.S. exports are projected to drop slightly to 15.4 million bales in the 2021 marketing year. With large stocks in other major exporting countries and a partial recovery in Australia’s production, the U.S. will continue to face strong export competition in 2021.

When combined with U.S. mill use, total offtake falls short of expected production, and ending stocks are projected at 2.6 million bales. If realized, U.S. stocks represent one of the lowest levels in the last 20 years.

World Balance Sheet

For the 2021 marketing year, world area is projected to increase slightly in response to higher cotton prices. World production is estimated to increase by 1.5 million bales in 2021 to 115.6 million bales.

World mill use is projected to increase to 120.9 million bales for the 2021 crop year, while world trade is estimated to increase to 46.0 million bales. World ending stocks are projected to decline by 5.4 million bales in the 2021 marketing year to 90.4 million bales.

December Cotton Futures

While the Council’s economic outlook does not attempt to project cotton prices, it is important to review some of the factors shaping the current price situation.

Although cotton prices were weaker in the first half of 2020 compared to the previous year, prices had improved during the second half of the year.

Prices have continued to strengthen in the first few weeks of 2021 and overall present the most bullish picture we’ve seen since mid-2018.

Final Thoughts

As with any projections, there are uncertainties and unknowns that can change the outcome.

Although global stocks remain high, a tighter U.S. balance sheet, low supply chain inventories and increased purchases from China are contributing to bullish sentiment for cotton prices. Other contributing factors include speculative money flow, weaker U.S. dollar, higher grain and oilseed prices, and post-COVID demand expectations

However, additional restrictions related to the ongoing COVID-19 pandemic, large stocks outside of China and low man-made fiber prices could put downward pressure on cotton prices in 2021.

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