USDA Upland Cotton Baseline,
2005-14
The U.S. upland cotton sector faces supply
and demand challenges early in the 21st century that
are related to both the domestic and international marketplace.
Outside the United States, cotton consumption generally
has risen much faster than production and has led to
a drawdown in foreign stocks and an increase in U.S.
raw cotton exports. Global textile and apparel trade
also has expanded, due largely to trade liberalization
measures and continued strength of consumer demand for
cotton products.
The
domestic textile and apparel industry, once the dominant customer of U.S. cotton
producers, now accounts for only about one-third of the total demand for U.S.
cotton. This share has fallen as textile and apparel imports from less expensive
foreign sources have displaced considerable supplies of U.S.-produced products.
On the other hand, foreign demand for U.S. raw cotton has risen, resulting in
a larger share of U.S. cotton moving overseas. Consequently, the U.S. cotton industry
faces increased global competition. The effects of these changes on the U.S. cotton
sector have been evaluated in preparation of USDA's baseline projections. Each
year, USDA updates its 10-year projections of supply and utilization for major
field crops grown in the United States, including cotton (see Overview
of the USDA Baseline Process for more information). The commodity projections
are used to forecast farm program costs and to prepare the President's budget.
One key use of the projections is as a "baseline" from which to analyze
the impacts of potential policy changes affecting U.S. agriculture. This discussion
summarizes the analysis underlying the cotton baseline projections for marketing
years 2005-14. Details about the baseline projections for the U.S. macroeconomy,
other U.S. crops, U.S. livestock, the U.S. agricultural sector, and global agricultural
trade can be found in the Agricultural Baseline
briefing room. Upland cotton planted area is projected to remain
relatively flat throughout the projection period, reflecting the competitiveness
of other crops and the stable demand for U.S. cotton. Small increases in cotton
yield account for a slight increase in production during the latter half of the
baseline. Meanwhile, most of the U.S. crop will be destined for overseas markets
in competition with producers from Africa, Australia, Central Asia, and the Southern
Hemisphere. Exports became the dominant market for U.S. upland
cotton in marketing year 2001 as the domestic textile industry faced intense price
competition from imported products. That competition continues and largely reflects
lower labor costs in foreign apparel production. The export-dominated market for
U.S. cotton is expected to remain throughout the projection period as further
reductions are foreseen for the domestic textile industry. However, increased
foreign competition may slightly reduce the U.S. cotton demand share of global
consumption over time.
Supply
The U.S. cotton industry continues to
face many of the supply concerns confronting other field
crops. Several factors underlie the long-term trends
that will determine U.S. upland cotton supplies during
marketing years 2005-14.
U.S. Upland Cotton Plantings on a Slight
Upward Trend. Upland cotton planted area in the
United States has been on a slowly rising trend since
the late 1960s, reversing the previous trend in cotton
acreage. However, the location of upland cotton plantings
has fluctuated considerably during this period. During
the mid-1970s, cotton area moved westward as Southeast
production costs rose significantly due largely to the
crop-damaging effects of the boll weevil. By the 1990s,
though, water concerns in the West and the successful
boll weevil eradication program in the Southeast saw
cotton returning eastward. Over the past several years,
upland cotton area has been about equally divided between
the eastern half (Southeast and Delta regions) and the
western half (Southwest and West regions) of the Cotton
Belt.
In
addition, planting flexibility provided under the 1996 and 2002 Farm Acts has
facilitated some fluctuation in upland cotton area as producers respond to market
signals and expected net returns. During the years covered by those acts (1996-current),
upland cotton area has ranged between 13.1 and 15.5 million acres, with the last
3 years averaging approximately 13.5 million acres.
Production Has Stronger Upward Trend.
Upland cotton production, like area, has seen an upward
movement over the past 20 years, but the production
trend has been more pronounced. U.S. production gains
during the previous two decades have paralleled advances
in technology (seed varieties, fertilizers, pesticides,
and machinery) and in production practices (reduced
tillage, irrigation, crop rotations, and pest management
systems). Results from these advances can be illustrated
in the record upland crop of nearly 22.3 million bales
in 2004 that surpassed the previous 2001 production
high. Also, the 2004 yield is forecast to be a record.
Demand
Several factors underlie the long-term
trends that will determine domestic and foreign demand
for U.S. upland cotton during marketing years 2005-14.
Textile Imports Increasing Their Share
of Cotton Fiber Demand. U.S. cotton fiber demand
on a per capita basis has seen significant gains since
the early 1980s as rising incomes and consumers' preference
for cotton prompted a turnaround. Between calendar years
1966 and 1982, U.S. per capita demand for cotton products
fell considerably, declining to only 13.5 pounds per
person by 1982. Nevertheless, over 80 percent of these
products were produced in the United States during this
period. That soon changed, however, and growth in imported
products strongly surpassed growth in demand, resulting
in a growing gap between mill demand and total cotton
fiber demand.
U.S. IndustryRestructuring Began
in the 1980s. The U.S. textile and apparel
industry began restructuring two decades ago. First,
the apparel industry—faced with rising labor costs—began
moving offshore as labor-intensive apparel items were
finished abroad and exported back to the United States.
The Caribbean Basin Initiative and later the North American
Free Trade Agreement sustained the U.S. textile industry
for a period as imported products containing U.S. components
received preferential treatment. However, trade liberalization
that began during the mid-1990s—along with the
Asia financial crisis and the strength of the U.S. dollar—diminished
these benefits.
As a result, increased textile and apparel import
competition required U.S. mills to reduce capacity and further
modernize or exit the industry as their customers moved overseas.
Also, admission of China to the World Trade Organization (WTO)
provided additional access to the U.S. textile and apparel market.
Over the past 7 years in particular, the U.S. textile and apparel
industry has faced intense competition from imported cotton products
that have dramatically expanded in volume and supplanted U.S.-produced
products, lowering domestic cotton mill demand. Trade liberalization
continued and, by the end of 2004, the remaining quotas were completely
eliminated for all WTO members. While U.S. per capita cotton fiber
demand has climbed considerably, reaching 35 pounds in 2004, less
than one-third is now manufactured in the United States.
Raw Cotton Exports' Importance
Grows. With the declines experienced
in the domestic textile and apparel industries since
1997/98, the relative importance of U.S. cotton exports
has grown considerably. During the early 1980s when
U.S. cotton mill use began a rebound, exports accounted
for just over half of the total demand for U.S. upland
cotton. As mill use grew, the export share declined.
More recently, however, raw cotton exports and their
share of U.S. demand have grown dramatically as record
world cotton consumption has increased the need for
U.S. cotton overseas, while U.S. mill use has fallen.
Baseline Projections for U.S.
Upland Cotton Supply and Use
Highlighted here are key findings for
U.S. upland cotton from the baseline analysis for marketing
years 2005-14. Annual projection details can be obtained
from the baseline's U.S.
upland cotton supply and use table.
Projected Area Up for 2005.
U.S. upland cotton plantings in 2005 are projected
at 13.8 million acres, 400,000 above 2004. The area
increase is attributable to several factors, including
the record national yield experienced in 2004. In addition,
based on competing crop prices, net returns are likely
to favor cotton over other crops in 2005. However, a
return to "normal" planting weather for the
upcoming season may limit the increase in upland area
in 2005. Planted area in subsequent years will be based
on expectations of net returns that reflect changes
in supply and demand; baseline area projections between
2006 and 2014 range between 13.5 and 13.8 million acres.
Upland cotton abandonment for 2005 and beyond is projected
at 10 percent, near the average for the previous 10
years. As a result, harvested cotton area during the
baseline period is expected to range between 12.2 and
12.4 million acres.
Upland Yields Continue Higher.
Upland cotton yields are expected to rise slightly over
the baseline period as advancements in genetics and
technology continue to improve the long-term yield potential.
A trend growth of 3 pounds per year is projected for
yields during the baseline period. The upland yield
for the first year of the projection period (2005) is
680 pounds per harvested acre. Although well below the
2004 record, the yield approximates the average of the
2001-03 crop years.
Supply Declines as Demand Offsets Production.
Boosted by record 2004 production, U.S. upland cotton
supply rose to a nearly four-decade high of over 25
million bales in 2004/05. Upland supplies are expected
to decline from these historic levels during the first
half of the baseline period and stabilize between 22
and 23 million bales. Beginning stocks are projected
to range between 4.7 and 6.2 million bales after 2005/06,
while production ranges between 17.5 and 18.1 million
bales. Imports of upland cotton are expected to remain
at minimal levels. Production remains relatively flat
before rising slightly in the latter years of the projection
period.
During
2005/06-2009/10, U.S. upland cotton demand is projected to exceed production,
reducing ending stocks from the relatively high level of 2004/05. However, during
the last 5 years of the projection period, demand and production are projected
to be about equal. Meanwhile, as the U.S. cotton industry becomes an increasingly
export-driven market, supply shocks in the United States and other producing countries
could lead to increased annual variability in U.S. cotton demand.
Role Reversal for the Domestic Industry
and U.S. Exports. Although the U.S. domestic industry
accounted for more than 60 percent of total U.S. upland
cotton demand in 1997/98, the share has been cut to
one-third in 2004/05, and is projected to continue to
decline over the next 10 years. The U.S. textile industry
has faced immense competition from imported cotton products
over the last 7 years and the trend is expected to continue
with the elimination of the remaining quotas on textile
and apparel products that occurred at the end of 2004.
By 2014/15, the domestic industry is expected to account
for only about 25 percent of the demand for U.S. upland
cotton.
In contrast, U.S. upland cotton exports
reached a record in 2003/04, accounting for two-thirds of estimated U.S. demand.
As declines in the domestic industry provide additional U.S. exportable supplies
over the baseline period, the gap between foreign consumption and production will
help determine the demand for U.S. cotton. Although increased foreign production
in 2004/05 reduced U.S. shipments of upland cotton, shipments throughout the projection
period rebound and reach new heights before the end of the baseline as world cotton
demand continues to expand.
U.S. Share of World Consumption Declines.
While rising U.S. cotton exports have bolstered the
U.S. share of global trade in recent years, the declines
experienced by the domestic textile industry have been
somewhat offsetting. As a share of world cotton consumption,
demand for U.S. cotton has declined from a high of approximately
25 percent in 1994/95 to about 18 percent in 2004/05.
Throughout the baseline period, the U.S. share of global
demand is expected to decline further as total demand
for U.S. cotton remains relatively stable and world
cotton consumption continues to trend higher with population
and income growth. By 2014/15, the U.S. cotton demand
share declines to 16 percent.
Stocks Decline Before Leveling Off.
U.S. upland cotton ending stocks and the stocks-to-use
ratio initially decline from the high 2004/05 levels.
Record production of 2004, along with lower total use,
forced upland stocks to jump significantly to the highest
level in nearly two decades. By 2009/10, ending stocks
decline to 4.7 million bales, while the stocks-to-use
ratio falls to about 27 percent. Upland stocks are then
expected to level off, as production and demand are
about equal. Stocks rise slightly to the 5-million-bale
level during the last year of the baseline period, while
the stocks-to-use ratio increases marginally to around
28 percent, similar to the average over the past 10
years.
Baseline Projections for World
Cotton Trade
The USDA baseline also provides projections
for trends in global
cotton trade.
Global Imports Rise Steadily.
Imports will account for about one-third of world
use of all cotton (upland and extra-long staple) in
2004/05. This share is expected to remain relatively
stable over the next 10 years, and world cotton trade
in 2014/15 is forecast at 38.3 million bales, almost
20 percent higher than in 2004/05. For hundreds of years,
importing countries have accounted for much of the world's
cotton spinning and, as late as 1979, the imported share
of the world's cotton spinning reached 46 percent. Later,
spinning shifted to countries that grow rather than
import cotton, and only 28 percent of global cotton
spinning used imported cotton in 1998. More recently,
major cotton growers, like China, have also become significant
importers, raising the imported share of consumption
once again.
While
many factors play a role in determining the location of cotton production, cotton's
long growing season and need for adequate water and sunshine limit the ability
of many countries to produce. Therefore, although the world's four largest consuming
countries—China, India, Pakistan, and the United States—are also the
largest producing countries, many important cotton consumers, such as Indonesia,
Mexico, and Thailand, produce almost no cotton at all. As a result, a much larger
share of the world's cotton is traded between countries than is the case for grain.
Incomes, Preferences, and Policy Drive
Consumption. Economic growth primarily determines
demand for cotton products. Changes in taste are also
a factor, and both consumer preferences and government
policy can shift consumers' preference for various fibers.
In China and India, strong economic growth and income
gains coincided with declining household consumption
of cotton products for long periods in the last few
decades as domestic policies encouraged rapid growth
in chemical fiber production and use. In other cases,
such as in Russia and Eastern Europe during the 1990s,
income clearly influenced both total textile purchases
and cotton's share of households' textile purchases,
as falling incomes coincided with a sharp drop-off in
household cotton product consumption.
After stagnating
in the early 1990s, world demand for cotton resumed its longrun growth in recent
years. The world lost about 12 percent of its demand for cotton during the early
1990s as real gross domestic product in Russia and Eastern Europe fell by about
one-third, and as yarn production shifted to countries whose textile industries
used fiber more efficiently. More recently, demand for cotton grew steadily and,
since 1995, total world demand for cotton has grown 2.1 percent per year. Over
the 10-year projection period, global cotton consumption is expected to grow about
1.5 percent annually as economic growth in Asia slows, converging on the global
average. Since 2000, developing Asian countries have replaced North America as
the main source of global consumption gains in cotton products, and the trend
is likely to hold through 2014.
Global Production Trends Mixed.
Investment in irrigation capacity has expanded both
consuming and exporting countries' ability to produce
cotton in recent years. China, Australia, Turkey, and
to a lesser extent Syria expanded irrigated acreage
for cotton during the 1990s. Turkey's expansion was
part of an ongoing expansion likely to continue, while
a slowdown in the other countries may reflect economic
or natural constraints on expansion. In contrast, Central
Asia's irrigated cotton area contracted significantly,
and is unlikely to rebound.
Dryland cotton area has expanded in India, West
Africa's Franc Zone, Eastern China, and Brazil. For China and
Brazil, this represented a rebound in area back to levels of the
mid-1990s; however, new technology has meant substantially higher
yields and production. India's yields have grown less, and West
Africa's average yields actually declined. In 2004/05, Eastern
China's planted area was significantly below previous highs, while
West Africa and Brazil have prospects for adding new area in the
future. The adoption of insect-resistant cotton varieties containing
Bacillus thuringiensis (Bt) has begun in India and
may have been an important factor in recent improvements in that
country's traditionally lagging yields. Brazil's yields are currently
extremely high and future trends there will depend on developments
in insecticide resistance in Brazil's new tropical production
zone.
Future Trade Prospects Face Uncertainties.
World trade will expand a little more slowly than the
1.5-percent rate foreseen for expansion in world cotton
consumption over the next 10 years, but still sufficiently
strong to sustain U.S. exports and the U.S. share of
global trade. However, the United States is likely to
face continued competition from Australia and West Africa
in the coming years. Australia's 2001-03 drought highlighted
the dependence of cotton producers on weather. Australia's
ability to produce even irrigated cotton will continue
to depend on El Nino oscillations, and West Africa's
output will depend on the longer cycles that have included
sustained precipitation since the beginning of the 1990s.
Central Asia is unlikely to return to its former status
as the leading U.S. competitor in cotton trade due to
reduced irrigation capacity that limits production and
increased domestic production of textiles that keeps
more cotton in the region.
Brazil is expected once again to be a major competitor
of the United States. Area is expected to grow in states like Mato Grosso, and
improving transportation should facilitate shipments to domestic mills and for
export. A number of smaller Sub-Saharan countries outside of West Africa—such
as Tanzania, Uganda, and Zambia—liberalized their economies during the 1990s
and should see production and exports continue to expand during the baseline period.
China and India are expected to continue importing
rather than exporting. The impact of Bt cotton on India's
output is a significant uncertainty over the next decade, and
some industry analysts even suggest that India could return to
a net export position. China's cotton area in the past has been
substantially higher than foreseen in the baseline, which highlights
the significance of uncertainty about the outlook for China's
cotton area. With the adoption of Bt cotton, China may
not need to import cotton if area returned to its previous highs.
U.S. Industry Is Facing Many Issues
The U.S. upland cotton industry continues
to face a number of issues, including many emerging
global challenges that will affect the viability of
the domestic cotton sector during marketing years 2005-14.
While technological improvements are key to reducing
production costs, the upland cotton sector continues
to face competition for area from other field crops
as net returns are the primary force behind planting
decisions. In addition, responsiveness to the challenges
of global competition is vital for a U.S. cotton sector
that will remain an export-dominated market. Furthermore,
the new dynamics of textile and apparel trade associated
with a quota-free environment remain a critical issue
for U.S. and global cotton industries.
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