Continued global population growth and more people worldwide moving into the middle class bodes well for cotton.
John Hart
With global mill use set to break records and cotton prices seeing their highest value since 2013-2014, Jon Devine, Cotton Incorporated’s senior economist, paints a mostly good news picture for cotton growers.
Moreover, continued global population growth, and more people worldwide moving into the middle class, bodes well for cotton. Short-term, the natural fiber has some market softness it must work through, but long-term the outlook is good, Devine says.
“Population growth is a good thing. The world not only has more people, but on average they are going to have fatter wallets, so they can spend more money on more things. Economic growth continues to occur in Asia. People are moving from a more subsistence existence to a more middle-class existence. Instead of worrying about where they are going to get their next meal, they can worry about buying some clothes that look good and are more comfortable,” Devine said at a Coastal Agrobusiness Cotton and Soybean conference in Greenville, N.C.
China is still the chief driver of the cotton market worldwide. Devine noted that in the past three years the Chinese government has been selling cotton from its reserves, drawing down the supply.
Chinese ending stocks in the 2017-2018 crop year are down to about half what they were in 2014-2015.
Devine said Chinese stock levels are still higher than what once was considered normal, but the Chinese market is returning to a period of normalcy.
“Normalcy for China means there are still some import quotas in place, but those import quotas should be much less restrictive. Given the fact they are less restrictive, and the Chinese government has lower supplies available, we can expect Chinese imports to triple at some time in the near future. A tripling in Chinese import demand is 10 million bales. That’s a huge amount of cotton,” Devine said.
“We expect Chinese imports to rise again in a pretty strong way,” he said.
Chinese reserves now stand at 2.7 million tons. The Chinese government has publicly stated they don’t want their cotton stocks to drop below 2.5 million tons. “Once it drops below 2.5 million tons, the Chinese government itself could be importing cotton to help increase its supplies,” Devine said.
“China is the world’s second largest cotton grower, and even though they grow a lot of cotton, they don’t have enough to meet their mill demand. Their production gap this year is about 15 million bales. China currently imports about 5 million bales. Their imports will need to increase to 15 million bales to match their production shortfall, implying a tripling of imports sometime relatively soon” Devine said.
“That’s a huge amount of cotton. The question is who is China going to get that cotton from? The natural answer will be the United States,” he said.
Still, there is a lot of uncertainty about U.S. cotton sales to China brought on in part by President Donald Trump’s tariffs as well as the Chinese government’s import restrictions. “The good news is we are not as dependent on China as we have been historically,” Devine said.
Due to Chinese import restrictions over the past two years, China has reduced purchases of U.S. cotton. “This past year, China was No. 2 in terms of destination for U.S. cotton. A couple of years ago, we were as low as No. 4 in terms of U.S, exports,” Devine said.
However, U.S. cotton exports to other destinations remain strong. “We started this crop year with a record amount of cotton sold to all locations, despite weakness in China. We are up about 2 million bales over a year ago. We started the year with record volume. The bad news is it has been relatively flat since then,” Devine said.
Global demand for higher quality machine-picked cotton remains strong. Devine noted that Brazil and Australia are the top competitors with the United States for machine-picked cotton. He said if the exports of Brazil and Australia are added together, the sum total is still less than 10 million bales, which is not enough to cover the increase in imports expected from China.
Devine pointed out there is a lot of volatility in Australian production due to the fact the Australian cotton crop is 100 percent irrigated in a semi-arid region. He said there is volatility in Australia’s irrigation supply brought on by a severe drought and a drawdown from irrigation reservoirs. Australia’s cotton production is expected to be down about 2.5 million bales this year.
Brazil is expected to have a record cotton harvest this year, but the gains are still just a couple of hundred thousand bales over last year, which Devine said is not enough to make up for the expected shortfall from Australia.
Finally, Devine says the United States may see an increase in cotton acreage next year.
“You guys feel good about cotton, your neighbors feel good about cotton,” Devine told the Coastal audience of mostly farmers. “If we have decent weather next year, we could have a U.S. cotton crop of 22 million bales. That’s a lot of cotton we have to move. If we don’t see China come in and start buying in the way we expect, we could see downward potential pressure on prices. Further out, I’m more optimistic. There is uncertainty between now and the next year or so. Beyond that, I feel better about prices.”
Source: farmprogress.com
