Monthly Economic Outlook

Prepared by:
Economic Services - National Cotton Council
April 2017

number of bales / 4.59

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 3.5 percent in the third quarter of 2016. Estimates from the Bureau of Economic Analysis show an increase of 2.1 percent in the fourth quarter of 2016.

OK-WTX CRUDE OIL SPOT PRICE – Since the beginning of the year, prices have fluctuated between $47.00 and $54.50 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 April was roughly $1.53 per gallon.

UNEMPLOYMENT RATEThe unemployment rate is 4.5 % for March, down 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 ’17, CBO projects a deficit of roughly $559 billion.  Deficits persist through 2022.

CBO AG BASELINE SPENDING Looking at fiscal 2014 through 2016, commodity programs are expected to costs between $2.4 and $8.8 billion per year, with conservation programs adding an additional $5.0 to $5.4 billion per year.  Within commodity support, cotton outlays average about $577 million per year.

WORLD REAL GDP GROWTH –The International Monetary Fund estimates that the world economy grew 3.40% during the course of 2015.  China’s economy was expected to increase 6.90% in 2015.  Estimates for India show GDP growth of 7.90% for 2015. For 2016, the world economy continued to grow at 3.10%.  China’s economy was expected to climb 6.70% in 2016 while estimates for India also show GDP growth of 6.80%.  For 2017, world GDP continues to climb at a rate of 3.50% 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 0.94 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 107.

AG PRICES RECEIVEDThe U.S. Department of Agriculture (USDA) publishes indices of prices received by farmers.  The latest index of crop prices is 86.6.  The index of livestock prices now stands at 99.2.

NET FARM INCOMENet farm income is forecast at $62.3 billion ($54.8 billion after adjusting for inflation) for 2017, down 8.7 percent compared to 2016. The calendar year 2016 net cash farm income and net farm income forecasts are $91.9 billion and $68.3 billion, down 12.2 percent and 15.6 percent from their respective 2015 levels. Both of the 2016 profitability measures are revised upward by 2 percent compared to the previous forecast release on November 30, 2016.

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 Over the life of each contract, the December 2017 contract has averaged roughly $0.71 per pound, $0.09 per pound higher than the December 2016 contract.           

DEC CORN FUTURES - Over the life of each contract, the average value of the December 2017 futures contract has been roughly $0.09 per bushel lower than the December 2016 contract.        

NOV SOYBEAN FUTURES - Over the life of each contract, the November 2017 soybean contract averaged roughly $0.86 per bushel higher than the November 2016 contract. 

U.S. COTTON ACREAGEUSDA estimates 2017-18 U.S. cotton plantings at 12.23 million acres, up 21.4% from 2016. Upland planted area is estimated to have increased 21.5% to 12.00 million acres. ELS cotton producers planted 232,000 acres, up 19.3%.

U.S. COTTON PRODUCTION – In its April report, for 2014, the USDA forecast U.S. production at 16.3 million bales.  A decline of roughly 3.4 million bales is projected for the 2015 crop with production falling to 12.9 million bales.  U.S. production is estimated to be roughly17.2 million bales for 2016/17.

U.S. COTTON SUPPLYIn the April report, USDA estimates production at 16.3 million and beginning stocks of roughly 2.4 million for the 2014 crop year.  Combined with imports this gives total supplies of 18.7 million bales for the 2014/15 marketing year.

By adding beginning stocks of 3.7 million bales to the 12.9 million bale crop, USDA believes total U.S. supply will fall roughly 2.1 million bales to 16.6 million bales in 2015.

For the 2016 crop year, combining projected production of 17.2 million bales with expected beginning stocks of 3.8 million bales results in a total U.S. supply of roughly 21.0 million bales. This is up roughly 4.5 million bales from the 2015 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 U.S. retail market’s size. It measures both cotton spun in the U.S. (mill use) and cotton consumed through textile imports. Total fiber consumption in 2016 is estimated to be 51.1 million bale equivalents. Cotton’s share of net domestic consumption decreased 0.8% this past year to 34.5%, which translates to 17.6 million bales. For 2017, NCC projects net domestic consumption of all fibers to increase to 52.0 million bales. With a projected share of 34.5%, cotton’s net domestic consumption is projected to be 17.9 million bales.

COTTON’S SHARE OF CONSUMPTIONWhile it is important that the retail market continue to grow, cotton must also be concerned with its share of the market and the competition from manmade fibers. During the past few years, cotton’s share of the U.S. retail market has been on the decline. In 2002, cotton’s share reached just over 43%. The higher prices of 2003 were met with some shifting from cotton to other fibers. As a result, cotton’s share of the retail market dipped. However, in 2006 cotton’s share of the retail market climbed back up to 43.1%.  For 2008, cotton’s share of the retail markets reached the 44.0% mark.  In 2009, cotton’s share had fallen back to just over 43%. This decline continued in 2010 through 2015.  Cotton’s share of the retail market is estimated at 34.5% in 2016.

U.S. RETAIL COTTON CONSUMPTION (MONTHLY) – The U.S. retail market reached 17.6 million bales of cotton textile products for calendar 2016.  Data through February shows us running roughly 61 thousand bales behind last year’s pace.

U.S. RETAIL COTTON CONSUMPTION (HISTORICAL) - Imported goods make up the largest portion of U.S. net domestic consumption. Imported cotton textiles are forecast to increase from 17.8 million bale equivalents in 2016 to an estimated 18.1 million in 2017.

U.S. COTTON TEXTILE IMPORTS - Imports of cotton goods in calendar 2016 decreased by 3.0% to 17.8 million bale equivalents. In calendar 2017, NCC projects cotton textile imports to increase to 18.1 million bales.

U.S. COTTON CONTENT - For 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 26.0% of all cotton goods imported in 2016 contained U.S. cotton. This is a 0.98% decrease over the previous year. In bale equivalents, these imported cotton goods contained 4.6 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 2016 were 866 thousand bales, down approximately 17.6% from the previous year.

COTTON TEXTILE TRADE WITH CBI –  Imported cotton goods from CBI for the year were 2.4 million bale equivalents, down 8.1% from the previous year.

COTTON TEXTILE IMPORTS FROM CHINA- Total cotton product imports from China decreased to 5.5 million bale equivalents in 2016, down 5.5% from 2015 and up by approximately 566.0% 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 32.0% in 2016.

CALENDAR MILL USE Mill use of cotton decreased from the previous year to 3.4 million bales in calendar 2016, 5.7% below 2015. For calendar 2017, NCC forecasts domestic mill use of cotton at 3.2 million bales

CROP YEAR MILL USEUSDA’s latest estimate for mill use in the 2014 crop year is 3.6 million bales. The USDA estimates 2015 crop year mill use at 3.5 million bales. For 2016, USDA projects domestic mill use of cotton at 3.3 million bales.

U.S. COTTON PRODUCTION & USE - Looking at the 2014 crop year, USDA estimates exports at roughly 11.3 million bales while U.S. production is estimated at 16.3 million bales and mill use is estimated to be 3.6 million bales.  For 2015, exports fall to 9.2 million bales while mill use is expected to drop to 3.5 million bales.  Production is expected to fall.  USDA estimates U.S. production to be 12.9 million bales for 2015/16. For 2016, mill use is expected to fall to 3.3 million bales while production is expected climb to 17.2 million bales and exports are expected to increase 4.9 million bales to 14.0 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 expected to be 30.0 million bales for the 2014 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 34.0 million bales.  For 2015, production will fall to 22.0 million bales while mill use climbs to 35.0 million bales. For the 2016 crop year, USDA projects production to climb to 22.8 million bales while mill use grows to 36.3 million bales.

WORLD COTTON PRODUCTION - USDA estimates put the 2014 crop at 119.2 million bales and roughly 96.7 million bales for the 2015 crop.  USDA estimates for 2016/17 show world production at roughly 106.3 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 topped 170 million bales. This is over 55 million bales above their estimate of the consumption of cotton.  For 2017, PCI estimates polyester consumption to rise to approximately 235 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 April report, USDA estimates 2014 world mill use at 111.4 million bales and 111.2 million bales for the 2015 crop year.  For crop year 2016 mill use is set at roughly 112.6 million bales.   

FOREIGN PRODUCTION & USEThe gap between foreign production and use influences our ability to export cotton.  In 2014, production is forecast at 102.9 million bales and mill use at 107.8 million bales.  For the 2015 crop year, production is estimated at 83.8 million bales and mill use at 107.8 million bales.  For the 2016 crop year, production is estimated at 89.1 million bales and mill use at 109.3 million bales.

U.S. COTTON EXPORTS According to USDA, the U.S. will export 11.3 million bales in the 2014 crop year.  In 2015, exports fall to 9.2 million bales.  For 2016, exports climb to an estimated 14.0 million bale mark.  

WORLD ENDING STOCKS - World stocks on July 31, 2015 are projected to reach 111.7 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 should be roughly 97.1 million bales by the end of the 2015 marketing year.  By the end of the 2016 marketing year, stocks are estimated to fall to 90.9 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 45%. The larger ’04 crop pushed that ratio back up to 60%. The ratio is estimated at 55% for the 2005 marketing year and 58% for 2006.  For 2007, the ratio is projected to remain unchanged at 58%.  In 2008, the stocks-to-use ratio should be somewhere around 62% and 48% in 2009.  For 2010, the stocks-to-use ratio is estimated to climb to 59%.  For the 2011 marketing year, the ratio is expected to climb to 66% and falls to 58% in the 2012 marketing year and is expected to drop to 54% through the 2013 marketing year. For 2014, the ratio is forecast to climb to 58%. The ratio is forecast to fall to 51% in 2015 and climb slightly to 55% in 2016.

U.S. SUPPLY & DEMANDIn its April report, U.S. production is estimated to be 17.2 million bales for 2016/17. Mill use is estimated at 3.3 million bales while exports are reported to be 14.0 million bales. The estimated total offtake stands at 17.3 million bales. With beginning stocks of roughly 3.8 million bales, this would result in U.S. ending stocks of 3.7 million bales on July 31, 2017, and a stocks-to-use ratio of 21.4%.

For the 2017 crop year, U.S. production is estimated to be 17.0 million bales. Mill use is set at 3.4 million bales while exports are reported to be 13.2 million bales. The estimated total offtake stands at 16.6 million bales. With beginning stocks of 3.7 million bales, this would result in U.S. ending stocks of 4.1 million bales on July 31, 2018, and a stocks-to-use ratio of 24.8%.

WORLD SUPPLY & DEMANDIn USDA’s April report, world production is estimated at 106.3 million bales for the 2016/17 crop year.  Mill use is set at roughly 112.6 million bales. With beginning stocks of 97.1 million bales, this would result in world ending stocks of roughly 90.9 million bales on July 31, 2017, and a stocks-to-use ratio of 80.7%.

World production is estimated at 108.0 million bales for the 2017/18 crop year.  Mill use is set at 114.0 million bales. With beginning stocks of 90.9 million bales, this would result in world ending stocks of 84.9 million bales on July 31, 2018, and a stocks-to-use ratio of 74.5%.