Adequate Supplies Are Holding Cotton Prices in Line. No Need for Area Increases. Cotton Demand Will Be Stable 00/01 05/06 10/11 15/16 20/21

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1 Cotton

2 Cotton prices declined over the past two years as cotton production responded sufficiently to ease the tight supply situation. This occurred despite a buying spree on the world market by China. That sharp increase in trade has subsided and prices remain at lower levels in 2013/14. Cotton prices are expected to dip slightly next year then rise over the projection period. Nevertheless, price increases are expected to be gradual, not returning anywhere near the severe spike of 2010/11. Easing prices over the past two years resulted in a drop-off of area from the recent peak in 2011/12. With yield increases and the end to China s import spree, this level of harvested area will be sufficient to supply consumption needs, given competition from man-made fibers. Global area is expected to decline for the next several years. The largest declines will be in China. Limits on arable land, emerging environmental problems such as erosion, and competition from grains and oilseeds for livestock and human consumption are constraining cotton production. The U.S. is also seeing competition from other crops that are constraining cotton area below levels of recent years. A WTO challenge to U.S. cotton policy from Brazil and changes in domestic policies from the 2008 farm bill have contributed to lower cotton acreage. Global cotton mill use peaked in 2006/07, rising by about 30 million bales from 2000/01. China s industrial investment push during that time was felt across many production industries that utilize basic commodities, including the cotton and textiles industries, and that nation accounted for the vast majority of the increase in cotton demand. Cotton demand has trailed off in several regions since the peak in utilization. While China accounted for the majority of the upswing, it accounts for only about half of the contraction. Textiles industries are shifting from developed nations to developing regions with cheaper labor, and the U.S. textile industry is undergoing a long-term decline. The outlook for cotton demand is similar to the pre-2005/06 levels when viewed on a per capita basis. As such, global population growth will be a major driver of cotton demand.

3 Adequate Supplies Are Holding Cotton Prices in Line Cotton adjusted world price, cents/lb No Need for Area Increases Cotton area, mil ha (L) Production, mil bales (R ) Cotton Demand Will Be Stable Global cotton mill use 150 Mill use, mil bales (L) Per capita, kg (R )

4 The sharp run-up in cotton trade in the first half of the 2000s is primarily attributable to China s increase in mill capacity and the development of value-added textiles and clothing industries. The higher trade in 2011/12 and 2012/13 was also attributable to China, although for a different reason. That nation has added a large quantity of cotton to its reserves. China s inventory building has subsided, and cotton trade has returned to more normal levels in recent months. Over the projection period, cotton trade will increase moderately as raw cotton is sent to mills in low-cost nations who then re-export it as value-added yarn, textiles, and clothing. Developing nations, especially those in Latin America are expected to increase cotton trade in the next ten years. The end of high cotton prices will bid land away from cotton and into other crops, making it necessary for them to purchase cotton on the world market to feed value-added textiles industries. Although production improved in the past three years, helping to boost ending stocks, nearly all the inventory accumulation occurred in China. As such, those reserves are not available to global markets and will not buffer any supply shortages that might occur outside of China. China s huge import drive took place as prices fell from the peak of 2010/11, indicating that China was building inventories as a buffer against not only domestic production shortfalls, but also against possible high international prices that would hike its import expenditures. It is difficult to determine when production shortfalls and accompanying high prices will occur. Therefore, it is equally difficult to predict if and when China will draw down its stocks. Ending stocks by the rest of the world are not particularly high and will not be able to absorb a very large supply decline in the future. Therefore, the world cotton market will remain potentially volatile. As such, China s stock buying strategy will remove similar volatility from its domestic market.

5 China Has Filled Its Needs, Temporarily Cotton net trade of exporting countries, mil bales China s Cotton Stocks Are a Major Uncertainty Cotton stocks-to-use, percent 175 Total Excl. China 150 China

6 World Cotton Supply & Utilization 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 (Million hectares) Area Harvested (Kilograms per hectare) Yield (Million bales) Supply Production Beginning stocks Net imports Utilization Mill & other Ending stocks Net exports Unaccounted Total Demand Cotton Area Harvested 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 (Million hectares) Argentina Australia Bangladesh Brazil China EU India Indonesia Pakistan Turkey United States Uzbekistan Rest of world World total

7 World Cotton Supply & Utilization 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/12 21/22 22/23 23/24 (Million hectares) Area Harvested (Kilograms per hectare) Yield (Million bales) Supply Production Beginning stocks Net imports Utilization Mill & other Ending stocks Net exports Unaccounted Total Demand Cotton Area Harvested 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/12 21/22 22/23 23/24 (Million hectares) Argentina Australia Bangladesh Brazil China EU India Indonesia Pakistan Turkey United States Uzbekistan Rest of world World total

8 Cotton Trade 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 (Thousand bales) Net exporters Argentina Australia 2,655 2,157 1,997 2,884 2,129 1,219 1,201 2,112 2,500 4,640 6,174 Brazil ,345 1, ,067 2,689 1,839 1,297 4,763 4,242 EU-28-2,699-1,605-1, India -1, ,275 4,410 6,900 1,560 6,070 4,550 10,480 6,550 United States 11,833 13,713 14,407 17,645 12,940 13,622 13,261 12,037 14,367 11,695 13,016 Uzbekistan 3,400 3,095 3,950 4,800 4,500 4,200 3,000 3,800 2,650 2,500 3,200 Total net exports 13,727 17,501 19,744 29,717 24,069 27,794 21,667 25,911 25,596 34,987 34,061 Net importers Bangladesh 1,600 1,800 2,250 2,450 3,250 3,600 3,800 3,900 3,700 3,200 3,600 China 2,376 8,659 6,355 19,248 10,500 11,468 6,912 10,880 11,857 24,478 20,280 Indonesia 2,213 2,130 2,180 2,180 2,380 2,680 2,380 2,485 2,390 2,295 2,595 Pakistan 641 1,635 1,198 1,327 2,088 3,638 1, ,750 Turkey 1,952 2,013 3,262 3,285 3,726 2,897 2,783 4,244 3,204 2,082 3,474 Rest of world 4,708 2,199 3,369 1,062 2,842 3,927 4,588 4,584 4,010 2,177 1,616 Total net imports 13,490 18,436 18,614 29,552 24,786 28,210 22,023 26,942 25,924 33,972 33,315 Residual , , ,

9 Cotton Trade 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/12 21/22 22/23 23/24 (Thousand bales) Net exporters Argentina Australia 3,996 3,915 4,093 4,196 4,266 4,323 4,376 4,402 4,405 4,423 4,453 Brazil 2,421 3,870 4,097 4,302 4,490 4,675 4,858 5,043 5,235 5,433 5,631 EU India 6,386 4,365 4,556 4,629 4,615 4,604 4,567 4,565 4,577 4,573 4,549 United States 10,216 10,546 10,991 11,124 11,229 11,411 11,519 11,573 11,665 11,853 11,872 Uzbekistan 2,813 2,635 2,597 2,562 2,530 2,500 2,471 2,442 2,415 2,387 2,360 Total net exports 26,195 25,601 26,575 27,036 27,356 27,754 28,042 28,289 28,571 28,951 29,438 Net importers Bangladesh 3,700 3,792 3,780 3,879 3,963 4,034 4,096 4,153 4,202 4,245 4,283 China 10,717 11,058 11,542 11,431 11,345 11,324 11,373 11,470 11,541 11,722 11,855 Indonesia 2,724 2,796 2,836 2,860 2,874 2,883 2,891 2,898 2,904 2,909 2,916 Pakistan 1,989 2,090 2,405 2,720 2,757 3,169 3,112 3,021 3,100 3,477 3,540 Turkey 4,000 3,624 3,631 3,648 3,721 3,774 3,821 3,872 3,908 3,936 3,985 Rest of world 3,052 2,226 2,367 2,485 2,683 2,556 2,734 2,862 2,902 2,647 2,844 Total net imports 26,181 25,587 26,561 27,022 27,342 27,740 28,028 28,275 28,557 28,937 29,424 Residual