* Brazil to maintain 2011's surge in cotton output next yr
* China emerges as Brazil's biggest cotton customer in '11
* U.S. trade reparations to fund sustainability projects
By Peter Murphy
BRASILIA, Oct 11 (Reuters) - Brazil will play a bigger role in the global cotton supply in the coming years with a dramatic surge in output and rising exports of the fiber to its top trade partner China, a sector official told Reuters.
The Latin American country's production of the fiber shot up to 1.96 million tonnes in 2011 from 1.2 million tonnes the year before, according to official data. Recent heavy capital investments signal these higher levels could be here to stay.
"Brazil has moved up a level" in cotton, said Haroldo Cunha, head of the Brazilian Cotton Institute (IBA) set up in 2010 to improve sustainability of local cotton cultivation. He previously ran Brazil's Cotton Producers' Association, Abrapa.
Brazilian grains producers piled into cotton production in 2010 after prices for the fiber rallied. By March this year it hit a record of $2.195 per lb -- nearly triple the year-earlier price.
With a government forecast for production of over 2 million tonnes in the next season, grains producers with choices remain enthusiastic about cotton crops even though prices have tumbled to around $1.03 per lb.
"With sales at above $1 with the dollar strengthening in the last few weeks, we imagine that we are looking at staying at 1.5 to 2 million tonnes in the coming years," said Haroldo Cunha, executive president of the Brazilian Cotton Institute.
Brazil's producers are expected to buy around 200 cotton harvesters in 2012 to cope with the larger crops, expanding a nationwide fleet estimated now at less than 1,500.
An outlay of $400,000-$700,000 per harvester itself demonstrates producers' belief in prospects for cotton.
Nonetheless, experts expect a global cotton surplus in 2011/12 as production ramps up, and the trade cautions that consumption could slow if another global recession hits.
Rising exports to the world's most populous country, China, itself a huge player in the global textile industry, provide some grounds for optimism in Brazil.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on cotton output: http://link.reuters.com/qyc44s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
SUBSIDY SQUABBLE
China leap-frogged South Korea and Indonesia this year to become Brazil's biggest cotton buyer, buying more than those countries together with imports of 104,000 tonnes from January to September, roughly doubling from the year-earlier period.
"The Chinese are gaining trust in our product," Cunha said, adding this has tended to be a difficult market to enter. China is already the world's top cotton producer, growing nearly four times what Brazil supplies.
China is Brazil's top export market overall, with soybeans and iron ore comprising the bulk of goods sent there. It is also a huge force in the global textile industry, with low wages giving it a major competitive advantage.
The Brazilian Cotton Institute was founded in 2010 to distribute funds received from larger cotton grower the United States to compensate for the depressed cotton prices resulting from its policy of subsidizing growers.
The countries agreed on the compensation deal as an interim measure to avert punitive sanctions against U.S. goods after the World Trade Organization (WTO) ruled in Brazil's favor in a dispute over trade distortions arising from subsidies.
Brazil has received $218 million from the United States since June last year but the payments are supposed to cease once the U.S. farm bill is revised in 2012. Brazil can take up the case again if the new bill does not address its complaints.
Projects IBA will fund include farmer training, stepped-up efforts to combat the boll weevil pest, a publicity campaign to promote use of the natural fiber in Brazil over synthetic alternatives and investments to tighten quality control.
IBA also plans to back projects in Africa's cotton sector, most of which is concentrated in the west of the continent.
