All about Cotton (Part I)

All about Cotton (Part I)

TextileFuture has given you already an insight on the latest April developments in cotton, now we would like to throw some light on different important markets of cotton. We start out with Bangladesh, then add Brazil, China, Pakistan, and Spain, Turkey and Vietnam, with detailed data provided by the U.S. Department of Agriculture

Bangladesh Cotton and Products Annual

Report Highlights

MY 2017/18 raw cotton production is projected at 130000 bales on favourable weather and expansion of American Upland cotton planted area; imports are projected to rise by 6.2 million bales on strong demand for diversified garment products and trade expansion with new non-traditional business partners.

Production

MY 2016/17 planted area levels are unchanged and production revised up by 5 % to 125000 bales. MY 2017/18 cotton planted area forecast is unchanged at 43000 hectares (HA), but production is forecast to rise to 130000 bales as cotton cultivation expands the area of cultivation of the long-staple American Upland variety.

Bangladesh primarily produces American Upland (Gossypium hirsutum) and Tree (Gossypium arboreum) cotton that represent 95 and 5 % of total production, respectively. Upland cotton is cultivated in the southwestern, northern, and central region, and tree cotton is grown in three Southeastern hill districts. The average length of Upland cotton is greater than 28 millimetres (mm); Tree cotton is less than 10 mm. Contacts believe American Upland cotton will be planted in hilly areas instead of other non-food crops.

Bangladesh Cotton Development Board (CDB) received approval from the National Committee on Biosafety to initiate a contained trial of eight Bt Cotton hybrid varieties. Mahyco Seed Company Ltd. is supplying Bt cotton seed containing Bollgard II double Bt genes Cry1Ac and Cry2Ab. CDB is planning to start trials during the next cotton season (July 2017). Previously the CBD found that field trials conducted on Bt Cotton variety Bt hybrid HSC-4 produced unsatisfactory results.

Value Added Cotton

MY 2017/18 yarn and fabric production levels are both forecast to rise slightly by around 0.5 and 2.3 % to 735,000 tons and 4.5 billion meters, respectively, as domestic demand holds steady while exports rise to meet increased demand for value-added textiles. MY 2016/17 yarn and fabric production estimates are unchanged at 730000 tons and 4.4 billion meters. Market sources report that competitive prices have attracted more foreign buyers to purchase Bangladesh fabric. Reportedly, some millers have increased production capacity to satisfy higher domestic and international demand.

Bangladesh currently has 424 spinning mills, 794 textile weaving mills, 241 dyeing and finishing mills, and a total of over 6500 registered and over 500 un-registered garment and textile factories. Sixty-five % of these factories are located in Dhaka district. A total of over 4300 Bangladesh Garment Manufacturers and Exporters Association (BGMEA) members employ some four million workers, of which about 80 % are women.

Textiles as well as other energy-intensive industries struggle to control production costs as expenditures for gas and electricity rise, which is in part driven by increased tariffs. The Bangladesh Energy Regulatory Commission (BERC) increased the Liquid Natural Gas tariff to BDT 8.36 (USD 0.11) from BDT 4.18 per cubic meter in MY 2015/16. They also raised gas tariffs by 130 % for generators and 60 % for general industrial purposes in MY 2016/17.

Industry sources noted that some millers are exploring more energy efficient solutions. For example, 67 Ready Made Garment (RMG) companies received Leadership in Energy and Environment Design (LEED) certification from the U.S. Green Building Council (USGBC); LEED-certified buildings use less water and energy and reduce greenhouse gas emissions. In continuing this positive trend, an additional 280 companies have filed applications for LEED certification.

As of February 2017 RMG export earnings were approximately USD 18.6 billion in FY 2016/17, up almost three % (Table 11) from last year. According to the Bangladesh Bank, since 2008 the GOB has provided a cash incentive of 5 % of the FOB export value for export-oriented RMG factories. In the last six years, this cash incentive may have helped Bangladesh RMG exports become price competitive in new markets such as Russia, India, China, Japan, Turkey, Brazil, Malaysia, South Africa, South Korea, Saudi Arabia, Australia, and New Zealand.

Industry contacts also report that new types of readymade garments are making it onto export markets, including high-end apparels like active-wear and outerwear, lingerie, suits/blazers and several types of denim. Reportedly brands such as Hugo Boss, Nike, Tommy Hilfiger, Adidas, Puma, G-Star, Diesel, Ralph Lauren, DKNY, Mango, Calvin Klein, and Benetton have all increased sourcing from Bangladesh.

 

Consumption

Ba Consumption

Trade

Ba Trade

Policy

The GOB Ministry of Planning has approved a US$ 70 million plan for Bangladesh Jute Mill Corporation (BJMC) to establish a jute textile plant which will make denim fabrics from a jute and cotton blend. In September 2015, the GOB published Export Policy 2015-18, which focuses on capacity building, improving quality standards, product diversification, and market expansion. The policy identified 12 manufacturing areas as the highest priorities, including the RMG, leather, jute, agro- processed, home textile, and terry towel sectors.

The RMG sector has set itself a target of USD 50 billion in annual exports by 2021. Hurdles to cross enroute include: ensuring occupational safety and regulatory compliance; establishing and protecting labour rights; unreliable gas and electricity supply; inefficient port services and transportation; changing market demand; currency devaluation; reliance on foreign expertise; and international political shifts. In addition, production cost has risen by 17 % over the past two years even as world market prices for apparel become more competitive. Nevertheless, Bangladesh has a sizable value chain from which to squeeze efficiencies: in FY 2015-16 Bangladesh manufacturers’  percentage of value added to exports reached above 75 %.

 

Ba Table 1

In 2013, the Government of Bangladesh (GOB) approved Bacillus thuringiensis (Bt) eggplant, and is currently supporting research for a variety of other commodities such as a late-blight-resistant potato. The GOB promulgated the Bangladesh Biosafety Rules (BR) 2012 and Biosafety Guidelines of Bangladesh (BG) 2007, which create a regulatory framework and approval process for all genetically engineered (GE) products developed domestically or by a third country. All GE products, including raw cotton (or cotton lint), need to be approved before they can be imported, sold commercially, or cultivated in Bangladesh. For more information, please see the GAIN report: Bangladesh Agricultural Biotechnology Annual 2016.

A draft of “The Textiles Act 2017”, if approved, will require new textile and garment factories to obtain license from the Textile Directorate. This act would give the Textile Directorate authority to uphold raw material quality, including for colours and chemicals.  The Ministry of Textiles and Jute passed “The Textile Industry Act 2015”, which requires compulsory registration for all garment and textile mills. This Act also authorized the Directorate of Textiles to oversee, monitor, and coordinate all government and private stakeholders to ensure labour safety and environmental protection. The Textile Industry Act 2015 partially complements the National Labour Rules 2015, which gives special emphasis to workplace safety and workers’ rights. For more information, please see the GAIN report: Cotton and Products Annual 2015.

Various incentives are offered by the Government of Bangladesh to develop the RMG sector and improve worker safety. Import tariffs are exempted for fire extinguishing equipment, energy-efficient electronics, some infrastructure, and raw materials for polyester yarn. A fund for safety remediation of the RMG sector is supported jointly by GOB, International Finance Cooperation (IFC), USAID, France Development Agency (AFD) and Japan International Cooperation Agency (JICA). With preferred interest rates (6-7 %), the industry can afford financing to improve safety measures as per the corrective action plans (CAPs) recommended by the GOB-ILO, Accord and Alliance. About 70 % of such remediation is completed among the Fire and Building Safety Accord-affiliated garments industry; about 65 % is completed for industry under the Bangladesh Workers Safety Alliance.

Ministry of Finance is implementing the Skill of Employment Investment Program with cooperation of BGMEA (Bangladesh Garment Manufacturers and Exporters Association). The programme was launched in 2015 and is expected to train nearly 44000 workers by 2018.

Beginning March 1, 2016 a new software application has enabled BGMEA to issue certificates of origin (COO) at reduced cost. BGMEA also expanded its warehousing facilities by 8000 Square feet at the import complex of the international airport, and it increased its fund from USD 15 million to 20 million to support loans to exporters.

GOB also is offering special incentives in container shipment through the inland container route of Chittagong-Pangaon-Chittagong; incentives of up to 70 % of shipment cost are offered to encourage use of these alternative shipping channels.

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Marketing

Bangladesh is almost entirely dependent on raw cotton imports. More than 40 % of imported raw cotton and 80 % of imported yarn and fabrics are used by spinning mills and the RMG sector to meet export demand. Makers of woven garments can add value ranging from 35 to 40 %; value added in knitwear is even higher, but exports of woven garments earn a higher amount of foreign currency.

Bangladesh has no import duties for polyester, viscose, acrylic, synthetic, and modacrylic staple fibers. The duty for textile chemical dyes is 5 %. Export-oriented RMG factories can import yarn and fabric under a duty-free incentive, which reimburses all customs duties paid on imported yarn and fabric (but not taxes such as the VAT and Advanced Income tax). Imports of all textile raw materials, including fabrics, have no quotas.

Ba Table 2. Bangladesh Area and Production of Raw Cotton

Value Added Cotton

MY 2017/18 yarn and fabric production levels are both forecast to rise slightly by around 0.5 and 2.3 % to 735000 tons and 4.5 billion metres, respectively, as domestic demand holds steady while exports rise to meet increased demand for value-added textiles. MY 2016/17 yarn and fabric production estimates are unchanged at 730000 tons and 4.4 billion meters. Market sources report that competitive prices have attracted more foreign buyers to purchase Bangladesh fabric. Reportedly, some millers have increased production capacity to satisfy higher domestic and international demand.

Bangladesh currently has 424 spinning mills, 794 textile weaving mills, 241 dyeing and finishing mills, and a total of over 6500 registered and over 500 unregistered garment and textile factories. 65 % of these factories are located in Dhaka district. A total of over 4300 Bangladesh Garment Manufacturers and Exporters Association (BGMEA) members employ some four million workers, of which about 80 % are women.

Textiles as well as other energy-intensive industries struggle to control production costs as expenditures for gas and electricity rise, which is in part driven by increased tariffs. The Bangladesh Energy Regulatory Commission (BERC) increased the Liquid Natural Gas tariff to BDT 8.36 (USD 0.11) from BDT 4.18 per cubic meter in MY 2015/16. They also raised gas tariffs by 130 % for generators and 60 % for general industrial purposes in MY 2016/17.

Table 2. Bangladesh: Area and Production of Raw Cotton

Ba Table 2. Bangladesh Area and Production of Raw Cotton

Ba Table 3

Ba Table 4 B

Ba Table 5 ABa Table 5 B

Ba Table 6

Ba Table 7

Ba Table 7

Ba Table 8 ABA Table 8 B

Ba Table 9

Ba Table 10ba Table 10 A

Ba Table 11

Ba Table 12

Table 12. Bangladesh: Share (%) of five basic products in Bangladesh’s total RMG Exports

Ba Table 13

Table 13. Bangladesh: Special incentive for internal container handling through Chittagong- Pangaon-Chittagong river route

Ba Table 13

Ba Table 14

www.usda.gov

Brazil exports to drop despite a recovery on Cotton Production

Report Highlights

Post forecasts Brazil’s 2016/17 cotton area at 910000 hectares (ha), a 5 % drop compared to the previous year. The reduction is due to a lower than expected planted area in Mato Grosso state, the largest cotton producing state in Brazil. Exports are forecast to reach 3 million bales and domestic consumption is forecast at 3.0 million bales.

Production

Post Reduces Planted Area and Production Forecasts for 2016/17

Post forecasts 2016/17 area planted to cotton at 910000 hectares (ha), an area reduction of 5 % compared to 2015/16. The reduction is due to a lower than expected planted area in Mato Grosso state, the largest cotton producing state in Brazil. The lower area in Mato Grosso is due to first-crop cotton areas shifted to soybeans as well as concerns by producers about cotton prices in the international market. The high cost of production and difficulty accessing credit lines domestically is also affecting producers. Mato Grosso is expected to plant 86 % of its area as a second crop, starting in January.

In the state of Bahia, the second largest cotton producing state, the area reduction is still expected to be about 17 % compared to last year. Post forecast planted area for the state of Bahia at 200000 ha. The reduction in this area is driven by concerns of low international prices and the high cost of production. In addition, the adverse weather conditions in the last few years have put cotton farmers in the region in a difficult financial situation.

Total production in Brazil is forecast at 6.5 million bales (1.40 million metric tons), an increase of 10 % higher compared to the 2015/16 season. The increase is a result of improved yields due to expected favourable weather.

B Table A1

Trade

Brazilian Cotton Exports to Drop in MY 2016/17

Post forecasts cotton exports for MY 2016/17 at 3 million bales, a 30 % reduction compared to the previous year. Despite the relative weak domestic consumption and the higher available cotton supplies in Brazil forecasted for the MY 2016/17, lower foreign demand and ample global cotton stocks will impact Brazilian exports.

B 1B 2

Consumption

Cotton Producers Association Helping Increase Domestic Consumption

Due to the ongoing Brazilian economic crisis since 2015, the textile sector was hit hard and consumption has dropped dramatically due to the high unemployment and lower disposable income by the population. According to the Brazilian Association of Cotton Producers (Abrapa), in 2015 alone, over 4000 cotton processing plants were closed and the trend continued in 2016. As a result, Abrapa implemented various initiatives to help increase and promote Brazilian cotton.

Abrapa launched a national marketing campaign to encourage the use of cotton products. The initiative called “I’m made of cotton” was launched in 2016 and has the support of Bayer and the Brazilian Cotton Institute (IBA).

In addition, Abrapa inaugurated on December 6, the Brazilian Reference Center on Cotton Analysis (CBRA). The centre, located in Brasilia, is now the central laboratory for the verification and standardization of Brazilian cotton grading processes. The center’s objectives is to guarantee the quality and credibility of the results obtained in the various laboratories in the country. The structure is part of the HVI-SBHVI Standard Brazil program, launched last October during the annual International Cotton Association (ICA) meeting in Liverpool, England. The centre will also integrate the entire network of fibre analysis laboratories in Brazil, currently made up of 14 units totalling 63 HVI machines. This will help improve the reputation of Brazil’s cotton and increase the consistency of the Brazilian cotton quality.

For MY2016/17, post kept its forecast for consumption at 3 million bales (664000 million t) due to the economic crisis.

Stocks

Clarification about Beginning/Ending Stocks Estimates

The USDA official estimates as well as this report are based on an August-July Marketing Year (MY). For example, MY 2016/17 correlates with Northern Hemisphere countries and not Southern Hemisphere countries such as Brazil. Hence, USDA’s beginning/ending stocks estimates capture Brazilian stocks mid-harvest on July 31st when they are at nearly their peak. This timing issue accounts for the relatively high stock levels and low volatility in stocks-to use typically reported by USDA and this report for Brazil.

As the main harvest in Brazil takes place in June, July, and August, stocks build dramatically as harvest progress outpaces domestic consumption and exports. Part of the reason for the inevitable build-up of USDA reported stocks is the structural delay between harvest and the shipment of exports. Ginning, consolidating, and transport to ports delays exports of new crop cotton initially and exports do not start in earnest until August.

www.usda.gov

China Cotton and Products Annual

China Makes a dent on its Cotton Reserves while Imports drop to second lowest level in 13 years

Report Highlights

Higher cotton prices in MY16/17 and continued government’s subsidies are expected to encourage cotton farmers to moderately expand cotton acreage in MY17/18.  Planted area is forecast to increase 3.3 %. Chinese cotton production is forecast to recover by 2 % to 5.15million metric t, still the lowest level in a decade compared to official production statistics. Despite the comparatively small domestic production, China remains focused on reducing its state cotton reserves. Industry observers expect China may succeed in lowering reserves to 5 million metric t by the end of 2008. Cotton use is expected to recover to 7.9 million metric t in MY16/17, and forecast to rise to 8 million metric t in MY17/18. The narrowing gap between domestic and global cotton prices contributed to this recovery and also resulted in lower yarn imports.  MY17/18 ending stocks are forecast to fall to 8.9 million metric t with stocks to use ratio down to 111 %. Anticipating Chinese sales of cotton reserves and restrictions on additional import quotas, China’s cotton imports are expected to drop further to 0.98 million metric t in MY16/17, the second lowest level in 13 years. Still, the Chinese textile industry continues to use higher-grade foreign cotton to stay competitive in export markets. MY17/18 total cotton imports are forecast at 1 million metric t.

Executive Summary: China’s MY17/18 cotton production is forecast to recover moderately to 5.15 million tons (million metric t) from the estimated 5.05 million metric t in MY16/17, and the 4.8 million metric t in MY15/16. Post forecast MY17/18 cotton planting area to recover to 3.1 million hectares (million ha) from the 3 Million ha in MY16/17. Lower earnings resulting from China’s government cotton policies implemented since MY14/15 contributed to the decade low cotton production in MY15/16. However, the “Target Price-based Subsidy Policy” for Xinjiang has proven to ensure basic returns for Xinjiang cotton farmers during the 3–year trial of the policy implementation. Hence, this policy will continue in MY17/18 through MY19/20 with a fixed target price unchanged from the MY16/17 level of RMB 18600/t (USD 2800/t). The stable target price and the increase in cotton prices in MY16/17 is expected to drive modest growth in the Xinjiang cotton area in MY17/18.  Similarly, the reduction of government support to corn production in 2016 is expected to encourage farmers to add cotton acreage moderately in other cotton-producing provinces.

The forecast steady economic growth, lower yarn imports, and the recovery of cotton fibre share (vs polyester) are expected to stimulate Chinese cotton consumption.  Thus, cotton consumption is estimated at 7.9 million metric t in MY16/17, and forecast to grow to 8 million metric t in MY17/18. Despite the small domestic production and the recovery in cotton use, China’s priority remains to ease the burden of its large cotton stocks following years of state cotton purchases. At the beginning of MY16/17, China’s cotton stocks were estimated high at 12.67million metric t, and expected to fall to 8.9 million metric t by the end of MY17/18. Stock-to-use ratio is down to 111 %. The government’s ability to control domestic supplies through sales of state reserves and limits to additional tariff rate quotas (TRQ) will continue to reduce cotton imports to an estimated 0.98 million metric t in MY16/17 and forecast 1 million metric t in MY17/18. Given the expected stagnant cotton imports and increasing competition from other cotton suppliers such as Australia, Chinese imports of U.S. cotton are expected to be lower at 250000 tons per year in MY16/17 and MY17/18. That said, seeking to stay competitive in export markets, the Chinese textile industry is likely to continue sourcing higher- grade cotton from the United States.

MY17/18 Cotton Production Forecast to Recover to 5.15 million metric t

MY17/18 domestic cotton production is forecast to recover to 5.15million metric t, up 2 % from an estimated 5.05 MILLION METRIC T in MY16/17. The forecast moderate growth is based on a 3.3 % expansion in planted area to 3.1 million ha. Increase in cotton prices and profits during MY16/17 contributed to the area expansion.

Introduced in MY14/15, the government’s “Target Price-based Subsidy Policy” for cotton production (covering Xinjiang only, see more in Policy section) has guaranteed basic returns for Xinjiang cotton farmers while effectively reducing earnings in other cotton-producing provinces. The policy switch in

MY14/15 led to a decade-low cotton production in MY15/16 (see GAIN report CH16024).  Recently, the Chinese government decided to continue the high target price support policy for Xinjiang in MY17/18 and continue it through MY19/20. For the next three years, the target price will remain unchanged from MY16/17 and fixed at RMB 18600 (USD 2906)/t. In addition, higher cotton prices and profits in MY16/17 further enhanced Xinjiang farmer’s confidence in cotton, as well as some farmers in other cotton-producing regions. Furthermore, as the government reduced support for corn production in 2016, farmers in some provinces may opt to plant cotton instead of corn.

Estimates for China’s cotton area and production continue to differ among sources. Below is a table of estimates by various sources for MY15/16 and MY16/17 area and production. China’s National Statistics Bureau (NSB) estimates MY16/17 total cotton production at 5.34 million metric t. This is based on a planted area of 3.38 million ha with yields averaging about 1582 Kg/ha. NSB’s data shows MY16/17 Xinjiang’s cotton production at 3.59 million metric t (about 67.2 % of total production) with an acreage of 1.81 million ha (or 53.6 % of total acreage). This production figure is far below the official classified volume of 3.93 million metric t for Xinjiang done by the China Fibre Inspection Bureau (CFIB) as of the end of February, 2017. However, the NSB MY16/17 production estimate of 1.75 million metric t for all other provinces is also significantly higher than the industry estimated production of about 1 million metric t. In its 2016 Cotton Production Announcement, NSB provided further details on its statistics methodology, described to combine remote sensing and sample surveys to estimate the planted area and yield in Xinjiang. For other major cotton-producing provinces including Hebei, Shandong, Henan, Anhui, Jiangsu, Hubei and Hunan, NSB conducted sample surveys to estimate the planted area and yield. In other small cotton- producing provinces, NSB used “comprehensive statistics” to obtain area and yield information.

C Cotton production estimates

Many industry sources believe the CFIB classified volume may provide the real production picture for Xinjiang. It is likely that the NSB’s 3.59 million t production data for Xinjiang is based on official statistical reports. These reports may reflect more of the local government’s intended plan to cut cotton acreage at the beginning of 2016 in response to the central government’s call to adjust the crop mix in light of the high state cotton reserves.  In addition, cotton planting in unreported lands continues to be one of the safest and most reliable sources of income for some farmers when the government target price is high. Hence, the government’s MY16/17 reduction target to reduce Xinjiang cotton acreage was not fully achieved.

MY16/17 cotton production for other provinces remains difficult to measure as the central government’s production-based subsidy policy can lead to over reporting by patrons at different levels. Based on all these factors, Post estimates MY16/17 production is 5.05 million metric t based on a planted area of 3 million ha.

Planted Area

Post forecasts MY17/18 total planted area will recover by 3.3 % to 3.1MHa from the estimated 3 million ha in the previous year. Specifically, the Xinjiang planted area is forecast up by 3 % to 2.03 million ha, and the rest to rise by 4 % to 1.07 million ha. Based on the implementation of the “Target Price- based Subsidy”, cotton planted in uncertified areas will remain ineligible to receive support payments in Xinjiang during MY17/18.  However, as mentioned above, the positive profits as a result of rise in cotton prices in MY16/17 will encourage farmers to expand cotton area in Xinjiang. Similarly, the planted area for all other provinces is also forecast to increase moderately in MY17/18. Again, the moderate expansion outside of Xinjiang provinces is in response to higher cotton prices, earnings, and less government support to corn in MY16/17.

C Chart 1

According to industry sources, a recovery in seed and processed cotton prices from the low levels in MY15/16 significantly improved cotton planting earnings in MY16/17. Cotton seed prices increased an average of 27.7 % and processed cotton increased by an average 20.7 % compared to the previous year.

In Xinjiang, along with the increase in cotton prices, good yields also contributed to higher returns and profits despite a moderate increase in production costs (labour and other inputs). Chinese industry sources estimate that cotton profits in Xinjiang stand at RMB 769/Mu (or USD 1737/ha) for hand-picked crop and RMB 860/Mu (or USD 1943/Ha) for mechanized harvest crop if the subsidy to farmers is included. These returns are significantly higher from the MY15/16. It is worth noting that the government subsidy will only cover the NSB certified production (3.59 million metric t compared to the CFIB classified volume of 3.94million metric t). Nevertheless, industry observers estimate the profits for this “additional cotton production” (not certified by NSB and ineligible to the government subsidy) could be higher at about USD 1350/ha in MY16/17. Despite the local government’s call for cutting cotton acreage in recent years, cotton planting in marginal land continues as farmers find cotton profits remain generally higher and are more stable compared to other competing crops. Despite the recovery in seed and cotton prices, there are several factors likely to discourage Xinjiang farmers from significantly increasing the province’s cotton acreage in MY17/18. Some of these factors include the fluctuation of domestic cotton prices in recent years; the fixed government’s target price; the government’s call for restructuring the crop mix; and limited water resources.

In provinces outside of Xinjiang, cotton earnings are also estimated to have recovered from the previous year’s negative level. The MY16/17 fixed direct subsidy of RMB2000 (USD 300)/ton will be paid to cotton farmers and is expected to continue at the same level in MY17/18.  Another factor encouraging farmers to add to the cotton area is the lower corn earnings resulting from the government’s reduction to corn support in 2016. However, cotton planting in these provinces continues to be challenged by increase in labour costs (almost 100 % harvest is handpicked), low yields, and cotton price fluctuation.

Additionally, in those provinces farmers have more crop choices and casual work is available in cities within the Yangtze River and the Yellow River regions. Thus, for these regions, Post favours only a moderate recovery in the planting area during MY17/18.

The China Cotton Association (CCA)’s February survey results show M


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