USDA Cotton World Report September 2017

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TextileFuture presents the latest figures on cotton, based upon the latest figures published by USDA, the US Department of Agriculture, including updates on the devlopment of China, India, Mexico and Turkey.

The 2017/18 U.S. cotton estimates include larger production, exports, and ending stocks relative to last month. Production is raised 1.2 million bales, with notable increases in the Southwest and Delta. Both harvested and planted area are raised, with abandonment slightly higher this month. Beginning stocks are revised 50000 bales lower based on indicated stocks as of July 31, 2017, exports are raised 700000 bales, while domestic use is unchanged. Ending stocks are forecast 200000 bales higher than the month before, at 6.0 million, or 33 % of total use. The forecast range for the marketing year average farm price is reduced 1 cent on each end, giving a range of 54 to 66 cents per pound.

With slightly lower 2017/18 world beginning stocks and slightly higher consumption only partially offsetting a 3.4-million-bale increase in production, world ending stocks are raised 2.4 million bales this month. Beginning stocks are reduced for India and Australia, offsetting an increase for Brazil. Production is raised for several countries, led by the United States and India. Larger production is also forecast this month for Brazil, Australia, Mexico, and Turkey. World trade is revised upwards by 600,000 bales. World ending stocks are projected at 92.5 million bales, 3.0 million above their 2016/17 level, but unchanged from a year earlier as a share of consumption.

China Cotton and Products Update

Chinese Imports Expected to Stay Stagnant Despite Recovery in Consumption

Report Highlights

Higher cotton prices in MY16/17 and continued government support to cotton production stimulated the recovery of Chinese cotton planted area in MY17/18, up 5.9 % to 3.12 million hectares (MHa), over the previous year. In light of expected good yield, MY17/18 cotton production is forecast to grow 7.1 % to 5.36 million metric tonnes. Cotton use is also expected to recover in MY17/18 to 8.38 million metric tonnes mainly due to the narrowing gap between domestic and global cotton prices. Increased cotton utilization is expected to reduce yarn imports. Correspondingly, MY17/18 ending stocks are forecast to decline to 8.64 million metric tonnes with stocks to use ratio down to 103 %. The Chinese textile industry is still eager to use higher-grade foreign cotton to stay globally competitive. However, the expected sales of Chinese cotton reserves and the current restrictions on additional import quotas are unlikely to allow significant increases in imports. Hence, China’s cotton imports are expected to remain stagnant in MY17/18 at 1.09 million metric tonnes.

Post’s forecast for MY17/18 domestic cotton production is 5.36 million metric tonnes, up 7.1 % from an estimated 5 million metric tonnes in MY16/17. The forecast recovery is based on a 5.9 % expansion in planted area to 3.12 MHa, and based on slightly higher yield. Increase in cotton prices and profits during MY16/17, and the government’s continued subsidies to Xinjiang province contributed to the cotton area expansion.

Based on a July survey, the China Cotton Association (CCA) forecast for MY17/18 cotton production is 5.42 million metric tonnes, up 9.2 % from MY16/17 and higher than its previous estimate of 5.37 million metric tonnes. Specifically by region, Xinjiang production is up 8.2 % to 4.27 based on a 5.6 % expansion in acreage and a 2.4 % increase in yield compared to the previous year. Comparatively, forecast MY17/18 production for the Yangtze River and the Yellow River regions stand at 0.51 million metric tonnes and 0.55 million metric tonnes, respectively, both up by over 13 % from

MY16/17. However, total cotton area in the Yangtze River and Yellow River regions has declined to its lowest level since MY14/15. Hence, the recovery in cotton production in these regions is not expected to contribute significantly to the nation’s overall cotton production.

The Chinese Ministry of Agriculture (MOA)’s August forecast for MY17/18 cotton production is 5.28 million metric tonnes, up 9.5 % from MY16/17. The higher cotton production is a combination of a 6.2 % acreage expansion and a 3.1 % gain in yield compared to MY16/17.

As of the end of July 2017, major sources agree that weather conditions remained generally favourable for cotton growth in most of the cotton-growing regions. Impact of diseases and pests is reported as minimal. In Xinjiang, more than 65 % of the interviewed farmers responded that the crop’s growth is better than the previous year, 10 percentage points over that in MY16/17. The impact of high July temperatures on the cotton crops in the Yangtze River and the Yellow River regions appeared to be limited.

Xinjiang Cotton Production Faces Challenges

In MY17/18, Xinjiang’s share of China’s total cotton production increased and remains high at 78.8 %. Xinjiang’s dominant share is the direct result of the central government’s support policy favouring cotton planting in this province along with lower profit margins for farmers in other cotton- planting regions. In addition, as production has decreased significantly in other cotton-planting regions, China’s textile industry is increasingly reliant on Xinjiang cotton.

Challenged by the rapid rise in labour costs, mechanized harvest is becoming increasingly popular throughout Xinjiang Province. This is particularly the case in the Xinjiang Production and Construction Corp (PCC) farms. Industry sources estimate that in MY16/17, about 90 % of the PCC cotton area was harvested mechanically compared to 70 % during the previous year. For non-PCC farms in Xinjiang, the rate of mechanized harvest remained relatively low in MY15/16 at 255,000 Ha, but still higher than 190,000 Ha in MY13/14. The increasing trend towards mechanization is expected to continue in MY17/18 and beyond.

However, based on inspection results in MY16/17, the Xinjiang Fibre Inspection Bureau reported new challenges for Xinjiang cotton. Cotton quality is impacted by the large number of cotton varieties currently planted in Xinjiang. Mechanized harvest of different varieties with various maturation times and other traits resulted in poor uniformity and high trash content. Xinjiang cotton trash content is reportedly up to 2 %. Hence, ginners’ excessive trash removal treatment contributed to deterioration in fibre length and strength. China’s textile sector complained that the losses in pre-spinning mechanized harvested Xinjiang cotton are higher than those from imported U.S. cotton.

Notwithstanding, overall, MY16/17 Xinjiang cotton quality has improved compared to the last three years when the government purchased most of the cotton for state reserves and farmers cared primarily about yield. It will take some time for the Xinjiang cotton sector to develop more adequate technology for mechanized harvest to fully upgrade the overall productivity of its cotton farming. This includes utilising appropriate cotton varieties and adopting better agronomical practices.

Stocks

Chinese cotton stocks are forecast to fall dramatically to 8.64 million metric tonnes by the end of MY17/18 compared to 10.6 million metric tonnes at the end of MY16/17. Increased use of state reserves and the moderate recovery in cotton consumption accounted for the fall. In addition, the forecast limited cotton imports, as a direct result of restrictions on additional import quotas, will also contribute to ending stocks falling in MY17/18.

The 2017 government’s cotton reserve sales began on March 6 and were initially scheduled to temporarily suspend at the end of August. However, the government has extended the sales to continue until the end of September in order to further reduce reserve stocks. Similar to 2016, the basic auction price is market–oriented (not fixed) and based on the average between the domestic and international spot market cotton price indexes during the previous week. The daily volume for auction will be about 30000 tons. As of August 18, 2017, the cumulative cotton purchased reached 2.4 million metric tonnes and accounted for 68.3 % of total offered volume. CCA estimates that the total volume sold by the end of September could reach 3 million metric tonnes, reducing the state cotton reserve to about 5.5 million metric tonnes. This would be considered a more manageable level compared to the 13.9 million metric tonnes in MY14/15, when China’s cotton reserves peaked after three years of state supported purchase programmes.

Cotton Trade

Cotton imports expected to be 1.09 million metric tonnes in MY17/18.

Despite the narrowing gap between Chinese and international cotton prices, and the expected fall in yarn imports, MY17/18 cotton imports are forecast to stay unchanged from MY16/17 at 1.09 million metric tonnes. The Chinese textile industry continues to seek higher-grade cotton from foreign suppliers to stay competitive in export markets. However, the government’s restriction on additional quota imports (subject to a sliding duty), outside the tariff rate quota amount committed under the World Trade Organization (WTO), temper the prospects for any significant increases in cotton imports. The WTO quota allows a yearly volume of 894,000 tons subject to a one % import tariff. Industry observers comment that the issuance of additional quotas appears improbable for 2017.

Anecdotal news stating that the government might consider special approval for imports of high-grade cotton to improve the mix of the state cotton reserve has circulated since July 2017. Trade data shows cotton imports from the United States are likely to hit a half million tons (high-grade cotton) in MY16/17 given that the WTO TRQ is only 89,000 tons per year. A relatively large Xinjiang crop of “higher” grade cotton could partially meet the industry demand in MY17/18. Liberalized yarn imports can also alleviate the shortage of high count yarn for fabric manufacturing. According to industry data, the Chinese textile sector recovered during the first half of 2017. In consideration of all these factors, it is unclear how and when the government will justify additional cotton imports specifically for state cotton reserve. However, given the government’s traditional role in regulating the cotton market, any form of government intervention should not be surprising.

Yarn imports have been an important factor exerting downward pressure on cotton imports in recent years. Unlike cotton imports, yarn imports do not face quota restrictions. High yarn imports partly lowered cotton imports in 2015 and 2016. However, the current small price gap between domestic and international cotton prices of about RMB1200 (USD 176)/ton is expected to reduce the profitability of yarn imports. The Forecast decline in yarn imports is expected to facilitate stable cotton imports in MY17/18.

U.S. cotton continues to compete with other suppliers for China’s limited import quotas

Chinese imports of U.S. cotton are expected to recover to about 490,000 tons in MY16/17 after falling to their lowest level in 14 years at 192,000 tons in MY15/16. Although the quality and reliability of

U.S. cotton appeals to China’s end-users, in MY15/16, Australian cotton became very competitive and topped China’s market with 268,000 tons. Chinese imports of U.S. cotton are likely to stabilize at 500,000 tons in MY17/18 given Chinese buyers’ preference for high-grade cotton when import quotas are limited.

Chinese cotton exports remains insignificant

China’s cotton exports average about 10,000 tons annually, a nominal amount compared to China’s total cotton use. Given the relatively low quality at a high price, sporadic cotton exports are likely in 2017 and beyond but are expected to remain insignificant.

MY17/18 Cotton Consumption Expected to Grow to 8.38 million metric tonnes MY17/18 cotton consumption is forecast at 8.38 million metric tonnes, up from an estimated 8.16 million metric tonnes in MY16/17. The growth in cotton use is mainly driven by a more market-oriented domestic cotton price, which is expected to reduce yarn imports and stimulate cotton fibre use in yarn production. Anticipated growth in domestic demand for textiles and apparel is also expected to moderately boost China’s cotton consumption. Chinese exports of textile and apparel are expected to remain stable.

Forecast lower yarn imports will stimulate China’s cotton consumption. In previous years, increased yarn imports significantly reduced China’s cotton use for spinning. The average net yarn imports hit 1.8 million metric tonnes per year from MY14/15 to MY15/16 compared to 0.5 million metric tonnes per year from MY09/10 to MY10/11. Industry sources indicate that the current gap between the domestic and international cotton prices (at about RMB1200 or UAS 176/ton compared to the RMB2000 or USD 300/ton in October 2016) will encourage more domestic spinning. Cotton utilization in yarn production is expected to continue recovering in MY17/18 in response to a more market-oriented cotton price.

According to NSB, in the first half of 2017, China’s textile production continued its steady recovery with yarn production increasing by 5.1 %, fabric production by 4.5 % and apparel production by 1.9 % compared to the previous year. Additionally, total investment in the textile sector increased 9.1 % from the previous year.

It is worth noting that textile investment in Xinjiang soared to RMB48 billion (USD 7 billion) in 2016 from the RMB9.6 billion (USD 1.4 billion) in 2014. Total spindles are expected to reach 16 million by the end of 2017, up from 7 million in 2014. Total yarn production is likely to reach 1.5 million metric tonnes in 2017, consuming 1.4 million metric tonnes of cotton roughly one third of Xinjiang’s cotton production. By comparison, in 2016, total yarn production was 1.13 million metric tonnes and cotton use was about 1 million metric tonnes. Xinjiang’s favourable policies, including tax reductions, and favourable power prices will continue to attract more investment in the textile and apparel industry in 2018 and beyond.

Exports of textiles and apparel expected to stabilize

Chinese Customs’ data shows that during the first half of 2017, total Chinese textile and apparel exports were up 2.2 % from the previous year and valued at USD 124 billion. Despite a slight decline in China’s share in key textile markets such as the United States, Japan and the European Union, Chinese exports to the “One Belt and One Road” region increased by 0.9 %. Chinese textile and apparel exports to Africa rose 4.1 % and hit USD 9.4 billion (equivalent to the total export value to Japan). Given the more competitive domestic cotton price, Chinese industry experts remain optimistic about the prospects for stable exports in 2017.

Growth in domestic demand for textile and apparel drives cotton use

China’s overall increase in demand for textile and apparel products is fuelled by higher disposable income, rising living standards, population growth, and urbanization.

During the first half of 2017, China’s economic growth reached 6.7 %. According to Chinese industry statistics, total domestic sales value of apparel and other textile products increased 7.3 %; the total textile sector’s output value increased 9.6 %; the sector’s profits increased 11.6 % compared the same period in 2016. All these indicators suggest a steady recovery of the Chinese textile industry and support more cotton use in MY17/18.

Policy

The fixed “Target Price” (at RMB18600 or USD 2776/ton) for Xinjiang from 2017 to 2019 is expected to stabilize cotton acreage in Xinjiang. The MY17/18 implementation of the target price-based subsidy in Xinjiang is expected to stay unchanged from MY16/17. In general, Xinjiang farmers welcome this policy as it provides predictability and assures the basic farming profits. However, as of this report, there is no official announcement for the fixed subsidy (RMB 2000 or USD 313/ton) for the other nine cotton-producing provinces.

India Cotton: Cotton Acreage Up 12 % from 2016/17

USDA forecasts India cotton production for 2017/18 at 30.0 million 480-pound bales, up 11 % from last year due to expanded planted area. Harvested area is forecast at 12.2 million hectares, up 12 % from last year. Yield is forecast at 535 kilograms per hectare, down 1 % from last year. The year-to-year decrease is due to erratic monsoon rainfall, unfavourable temperatures and pest problems. India’s main cotton regions (north, central, and south) have all reported increases in planted area relative to last year. Both the north and south reported a 35 % increase in planting from 2016. The major cotton areas in central India (Gujarat, Maharashtra, and Madhya Pradesh) reported planting area up by 8 % from 2016. The southern cotton areas are still sowing cotton.

Erratic monsoon rainfall in southern and central India have impacted the cotton crop, while heavy rainfall caused flooding in northern Gujarat. According to a report from the USDA agricultural attaché in Mumbai, floods missed the southern cotton planting areas but heavy rains replenished topsoil moisture in Gujarat. In northern India, the cotton crop is 75 to 80 days old and has reached boll formation. In central India, the cotton crop is 20 to 35 days old except in the south where it is still being sown. There are reports of whitefly, aphids, and pink bollworm, but farmers are taking precautions to control infestation.

Mexico Cotton: Estimated Output Increases from last year

USDA estimates 2017/18 cotton production at 1.38 million 480-lb bales (300,000 metric tons), up 20 % from last month and up 80 % from last year. Harvested area is estimated at 185,000 hectares, up 19 % from last month and up 80 % from last year. The estimated harvested area is up 33 % from the 5-year average. Yield is estimated at 1,624 kilogrammes per hectare, up slightly from last year.

Official reports cite planted area for the spring/summer cycle at 178000 hectares as of July 30,2017, up 78 % from the same date last year and up 31 % from the 5-year average. The most notable area increases were reported in Chihuahua and Baja California (the top two cotton-producing states) where planted area has increased approximately 70 % and 135 % from last year, respectively. Farmers have increased area to cotton this year due to favourable prices and unattractive returns for competing crops. Planting for the spring/summer cycle – predominantly irrigated – is virtually complete and has progressed under ideal conditions. Harvest began in August and extends through January.

Turkey Cotton and Products Update

Report Highlights:

The MY 2017/2018 Turkish cotton crop now estimated at 460000 hectares and 840000 MT (3.2 million bales). Even though excessive rains delayed planting and cool weather following planting impacted growth in the Aegean and GAP regions, good farming practices and plentiful irrigation water affected yields positively later in the season. Presently the crop is developing well with no major pest problems, pushing yields higher in all regions. Domestic cotton consumption for MY 2016/2017 is about 1.42 million metric tonnes (6.5 million bales), up slightly due to increases in domestic use and export markets. Total cotton imports during the first eleven months of MY 2016/2017 were 700000 MT (3.2 million bales) of which 318000 MT (1.45 million bales) were U.S. cotton.

Production

MY 2017/2108 cotton planting area and production are now estimated about 460000 hectares and 840000 MT, up about 15% and 20 % respectively compared to last crop year. In recent years Turkish farmers have been improving their field yields by increasing utilization of high quality certified seeds, taking measures to prevent pest attacks and using increasing amount of cotton harvesters. As of late August, no major pest attack is reported and the crop is developing well in all three major cotton growing regions: GAP, Aegean and Cukurova.

The Turkish government, to promote cotton planting, has been increasing the seed cotton production bonus during the last six years. Accordingly, MY 2017/2018 seed cotton production support increased to TRL 0.80 per kilogram from 0.75 per kilogramme a year ago (as of 8/24/2017 USD 1= 3.5 TRL). The support is provided only to certified seed users.

Turkey became part of the BCI (Better Cotton Initiative) four years ago and expected to produce about 40000 MT of BCI cotton in MY 2017/2018.

Consumption

Domestic consumption is expected to go up, though marginally, to 1425 million metric tonnes (6.5 million bales) during MY 2017/2108, due to increase in demand from domestic and international markets. Turkish mills have been investing in new machinery and technology to increase quality and lower costs to be ahead in the very competitive international textile trade. Domestic consumption is also expected to grow in MY 2018/2019 due to the upward trend in traditional export markets such as Europe and Russia, and also in new markets such as Iran. Additionally, relative growth in the economies of the Middle East region will also help to increase exports of Turkish textile products.

Trade

Total cotton imports for the first eleven months of MY 2016/2017 were about 700000 MT (3.2 million bales), down about twenty two % compared to the same period last year due to an increase in local availability. About forty five % of the imports were sourced from the United States, which is 318000 MT (1.45 million bales) despite the three % antidumping duties which are currently applied to U.S. cotton. Brazil (77000 MT), Turkmenistan (67016 MT) and Greece (75000MT) were the other leading suppliers during the same period. Despite the war conditions, about 26000 MT of Syrian cotton also found its way to the Turkish market.

During the first eleven months of MY 2016/2017, low local prices triggered exports and Turkey’s cotton exports were up about three times reaching 32000 MT. Bangladesh (10800 MT), Indonesia (5800 MT), and Vietnam (5600 MT) were the leading foreign destinations for Turkish cotton. About 2500 MT of cotton was also exported to the Mersin and Kayseri Free Trade Zone with a possibility of being re- imported later. Additionally, Turkey exported about 37500 MT of hydrophilic cotton for medical use during the same period, which added to exports in the PSD.