Cotton Outlook

Cotton Outlook

Textile World AsiaSpecial ReportStrong DemandIn The ForecastFollowing a record-breaking
2004/05 crop in the U.S., Cotton Incorporated forecasts cotton supply to return to previous years’
levels. However, demand remains strong.The outlook for cotton supply and demand for the 2005/06
crop year suggests lower production and higher demand relative to the previous year. The result of
this change would be lower ending stocks and lower stocks-to-use ratios, domestically and
worldwide. Early-season estimates of prospective plantings in the U.S. are forecast to be little
changed from 2004/05, reaching approximately 13.7 million acres.The 2004/05 crop was unusual not
only in the number of acres planted, but also in the relatively little amount of acreage
abandonment and yield per harvested acre. Cotton Incorporated believes that a primary contributing
factor to these unusual events was generally good growing conditions and favorable weather across
the U.S. cotton belt throughout the growing season. Assuming a return to more normal weather
patterns in 2005, abandonment and yield are likely to return to more traditional ranges.
Accordingly, even with plantings comparable to last year, 2005/06 production is forecast to decline
to approximately 19.5 million bales (see Table 1).Domestic demand, comprised of domestic mill usage
and exports of raw cotton, is forecast to remain relatively flat this year. In light of increased
import penetration of textiles and apparel resulting from the 2005 quota phase-out, domestic mill
demand is projected to decline by 500,000 bales to 5.8 million bales. Exports, owing to expected
record purchases by China, are forecast to climb by 600,000 bales to a record 13.8 million bales.
On balance, with demand higher than production, ending stocks are projected to slip to 7 million
bales, tightening the stocks-to-use ratio to 35.7 percent.Beyond 2005/06, forecasts for U.S. supply
and demand are based upon econometric models of production and consumption constructed by the U.S.
Department of Agriculture. Production is projected to decline over the forecast period to
approximately 17.6 million bales. Anticipated mill use and exports are seen declining over the
forecast period. Generally, demand is projected to continue to outpace production, implying
progressively smaller raw cotton inventory levels. This in turn serves to tighten the stocks-to-use
ratio each year over the forecast period, implying progressively stronger average prices.Changes in
world fundamentals in 2005/06 closely mirror changes in the U.S. and portend a similar direction in
the market in the new crop year. Production grew to an unprecedented 117.7 million bales on the
strength of higher plantings, and especially on the strength of record yields worldwide (see Table
2).Production gains were widespread, as no major producer experienced particularly adverse weather
or growing conditions. Given the lower returns on cotton paid to producers during the recent
harvest, world plantings for the new crop (2005/06) are forecast to drop approximately by 12
percent. Similar to the assumption in the U.S. of a return to more normal weather patterns in the
new crop year, yield and output are expected to decline worldwide. The combined effects of lower
plantings and lower yields suggest 2005/06 production may decline to closer to 100 million
bales.China Drives ConsumptionMill use of cotton is strongly influenced by two key variables:
economic growth and the relative prices of cotton and polyester. With estimates for expansion of
world economic activity close to estimates seen in 2004, world gross domestic product is likely to
contribute to growth in cotton mill demand in 2005/06. The recent increase in crude oil prices has
served to propel polyester prices to the highest levels in years, opening a large gap between
polyester and lower-priced cotton. For these reasons, cotton consumption is forecast to expand in
2005/06, reaching a record level of demand at about 109 million bales.China remains the key driver
in growth in world mill consumption of cotton. This trend is expected to continue into the next few
years, particularly in light of the recent quota phase-out.In 2004, China enjoyed record textile
and apparel shipments to a number of nations, including Japan, the European Union, the United
States, Australia, Turkey and Mexico. Growth in cotton consumption, yarn production, and fabric and
apparel output confirms this trend. Assuming current projections remain valid, mill demand is
likely to exceed 40 million bales in 2005/06. In fact, in recent years, these mills’appetite for
cotton has grown too large for China’s cotton farmers to satisfy, so China has become a major
importer of cotton, particularly from the U.S. In the absence of quotas, the growth in cotton
textile and apparel shipments out of China is likely to accelerate, creating increased demand for
raw fiber inputs in Chinese mills to feed this export demand. China’s position as the largest mill
consumer of cotton remains secure and the likelihood of Chinese mills accounting for a larger share
of total world mill demand seems likely.Inventory ShrinksWith world mill consumption outpacing
production in 2005/06, ending stocks are likely to contract and reverse course from the expansion
seen this year. At 38.6 million bales, inventories will lower the stocks-to-use ratio to 35.4%,
well below the level seen in 2004/05 and closer in line with levels experienced in 2003/04,
suggesting world prices may appreciate from lows seen in 2004/05 and return to a range similar to
2003/04. The “World Monthly Stocks/Use Ratio Vs.‘A’Index”graph (see Page 26) illustrates this
relationship seen over the past five years. The red dot indicates the forecasted stocks-touse ratio
for 2005/06. Assuming this historic relationship persists, the anticipated level of “tightness”in
the market next year suggests a price range of 56 cents to 66 cents per pound for cotton.
Similarly, comparisons of supply and demand forecasts in Table 3 for 2005/06 from Cotton
Incorporated, Cotlook Ltd., and the International Cotton Advisory Committee all point to a mild
appreciation in price during 2005/06 from levels seen during most of 2004/05.
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Outlook Charts

Editor’s Note: This outlook was provided by the Strategic Planning Division of U.S.-based
Cotton Incorporated. It has been edited for clarity and space.

By Carmen Pang, Executive EditorPromoting Cotton Markets And QualityCotton not only is one of
the oldest fibers used in textiles, it also is one of the most popular. For that, the plant has
Cotton Incorporated to thank. Established in 1970, the U.S.- based not-for-profit trade group’s
mission is to build demand for cotton.“We’re engaged in research and marketing activities that
further thedemand for cotton,” said Mark Messura, Cotton Incorporated’s vice president of strategic
planning.“ We do technical research in textiles and yarn manufacturing, consumer research, economic
research — all the kinds of things that are necessary to support cotton as a fiber in the
marketplace.”Market GrowthAccording to Messura, cotton use, both in terms of total use and
per-capita use, has been rising. In 1973, cotton’s market share in the United States, measured by
weight for all categories of clothing, was 34 percent; currently the share is more than 60
percent.“It has almost doubled over the past two decades,” said Messura.Despite the sustained
growth in market share,Messura said there are challenges in promoting cotton use.“The No. 1
challenge is to make sure cotton is competitive with manmade fibers,” he said.“Most consumers, in
the products they buy in the U.S. market, look for cotton. But if there are advances in products
and you can improve stain repellency or soil release or wrinkle resistance with synthetic fibers,
our challenge is to show that you can do that with cotton fibers as well.There are new fibers out
there all the time, cotton’s challenge is to stay competitive and stay relevant.”In addition to the
domestic market, a large portion of U.S. cotton is exported to other textile producing countries.
According to Messura, the biggest export markets for U.S. cotton are China,Turkey,Mexico, and
Indonesia.“The shift is toward China, but we believe we’ll continue to see growth in India,
Pakistan and Bangladesh,” said Messura.“We’ll most likely continue to see a slight decline in the
U.S. numbers, but definitely the shift has been toward China.”Besides the United States, which is
expected to produce 23 million bales of cotton this year, other major cotton producers include
China (with 29 million bales this year), India (with 16.4 million bales this year) and Pakistan
(with 11.5 million bales this year).These and other countries will together supply the world with
117.7 million bales of cotton this year.Cotton QualityIn addition to marketing cotton to consumers
and industries, Cotton Incorporated also plays an important role in quality research. Over the
years, cotton fiber quality, as with production yield, has been improving. In the United States,
this improvement culminated in the exceptional crop harvested last year.“Last year, we had a crop
with record yield,” said Mike Watson, Cotton Incorporated’s vice president of fiber quality
research. “It wasn’t just a record yield, but it was like breaking the four-minute mile by 10
seconds. It was a hugely recordbreaking yield. At the same time, that crop was, on the whole, of
better quality on measurable qualities such as average length and average strength. It was
extraordinary.”As with all types of agriculture, cotton quality and yield are affected by three
main factors: weather pattern, crop variety and farm management. Other than weather, which is
largely beyond the control of human intervention,Watson said there have been significant
improvements in the other two areas.“Over the course of history, there has been a long gradual
increase in the quality of cotton. It has gotten longer, stronger, wider, cleaner,” he
said.“Varieties have gotten better and farmers have gotten smarter.” He added that there is a
constant arms race going on to produce better cotton varieties that are more tolerant to
environmental stress, or that have increased productivity, or that produce better quality cotton.

Mike Watson, Vice President— Fiber Quality Research,Cotton IncorporatedStandardized Grading
SystemTo grade the quality of cotton fiber, the United States uses a classing system that is based
on both machine-measurable qualities and trained classifier evaluation.When a bale of cotton is
ginned, a sample is taken from both sides of the bale. That sample, after being assigned a
permanent bale identification tag, is sent to a U.S. Department of Agriculture cotton classing
office where it is tested with a high volume instrument for strength, staple length, length
uniformity, micronaire and color.The sample is then passed to a trained classer who assigns a leaf
grade and looks for other problems such as bark and grass in thecotton. A class is assigned based
on the high volume instrument readings and classer evaluation.That class grade is then entered into
an electronic database, which stores the data of every bale of cotton produced in the United

Cotton Incorporated works closely with retailers to promote cotton to consumers.2005 David
Meister, Saks Fifth AvenueAccording to Watson, 95 percent of all cotton falls into five classes.A
standardized grading system allows an objective evaluation to be made on a product that is by
nature not uniform.To further help cotton users choose the appropriate cotton for specific product
needs, Cotton Incorporated has an Engineered Fiber Selection (EFS) inventory management software
that searches an inventory to locate the bales that best match the product requirements.“The idea
is you use a raw material that’s just good enough to produce a product that’s acceptable to your
customer,” said Watson.“That’s the whole idea behind any cotton purchasing strategy.You don’t buy
the best cotton possible, you buy the lowest-quality, least-expensive cotton that is consistent
with making a product that makes your customer happy.That’s what we can do with EFS.”According to
Watson, more than 90 percent of the cotton processed in the United States uses the EFS software.
However, the international market is expanding as well.“There are now more than 20 mills
internationally that use the software,” said Watson.“To get the software, we’re going to require
you to use a certain percentage of U.S. cotton. From the U.S. cotton perspective, that ties them
into using a fairly significant percentage of U.S. cotton.”Despite its advantages, the EFS software
can only be used to select U.S. cotton because it relies on the bale classing system, which is a
grading system used only in the United States.“Each major cotton producing country, over the years,
has evolved its own cotton classification method and has its own standards,”Watson
said.“International cotton trade and cotton usage would be enhanced if we had as much common
terminology as can reasonably be applied.We would like to see the uniform commercial application of
classing technologies, so that if someone tells me that a cotton is 34 millimeters in staple
length, I know what that means whether it was classified in Spain or in China or the U.S. or South
Africa.”This sentiment seems to be shared by some in the international cotton community. In fact,
the theme for the International Cotton Advisory Committee’s (ICAC’s) upcoming 64th Plenary Meeting,
to be held in the United Kingdom this September, is “Industry Standardization: The Key to Trade
Growth.”The ICAC, headquartered in the United States, is an association of more than 40 governments
of cotton producing, consuming and trading countries. According to the ICAC, the meeting theme
“emphasizes the underlying purpose to enhance opportunities for expanded trade in cotton as a
component of a healthy cotton economy.”As such global trade increases, cotton is destined to remain
as popular tomorrow as when it was allegedly first used in clothing more than a thousand years ago.

May/June 2005