Rabobank Report Shows Promising Long-Term Outlook

From a company release

NEW YORK, June 27 /PRNewswire/ -- Despite 2008's U.S. cotton acreage forecast at its lowest level in more than 20 years, the long-term outlook for cotton appears promising. Changes in the global sector and an improved U.S. economy are likely to increase textile demand, and with it demand for cotton, according to a new Rabobank report, "U.S. Cotton."

"This ailing patient, the U.S. cotton sector, shows every sign of a great recovery -- it just may need at least another year to recuperate," said report author and Rabobank Food & Agribusiness Research and Advisory (FAR) Vice President Michael Whitehead. "While the long-term outlook for the cotton sector in the United States is favorable, the sector may still endure some pain before things improve."

U.S. Production

U.S. cotton acreage fell by almost 30% in 2007-08, to approximately 11 million acres -- its lowest level in 20 years. Cotton acreage reductions were large across all the major cotton growing regions, ranging from a 21% fall in California and Arizona to a 35% drop in the Delta region (Arkansas, Louisiana, Mississippi, Missouri and Tennessee). And, these numbers are likely to fall further. With the prices of corn, soybeans and wheat forecast to remain strong, growers are likely to continue to move away from cotton.

The forecast for the 2008-09 year shows that cotton acreage is forecast to continue falling, declining another 13% to just over 9.4 million acres -- the lowest level since 1983. "Acres in the Delta region are likely to see a larger decrease, approximately 30%, a change which would see that region losing over half its cotton area in just two years," said Whitehead. Decline in other areas is not likely to be as severe.

"Despite the relatively low acreage, in the long term, the U.S. cotton sector is likely to strengthen, largely due to changes in the global sector," said Whitehead. "The U.S. cotton sector is likely to improve as major global cotton producers -- such as China and India -- increasingly divert more acreage into food production to keep pace with rising incomes and populations. This would likely raise the price of cotton and entice U.S. farmers to increase their cotton acreage."

Global Production

In contrast to the big fall of cotton acreage in the United States, cotton acreage in China grew slightly, although with lower yields. However, going forward, the outlook for China's cotton acreage rests on a couple of scenarios.

• First, cotton production could receive a boost from the Chinese government's plan to provide 500 million Chinese Yuan for farmers to buy improved cotton seeds, which would enhance overall yields.

• Second, with an increased focus on food security, China is likely to increase its domestic production of grain and oilseed foodstuffs, which would cut into cotton acreage. Additionally, with the government focused on building food stocks, cotton production may decrease and force China to look elsewhere for cotton sources -- such as Africa.

"While cotton production in Africa continues to have great potential, growth is slow and volatility is ever present," said Whitehead. "Additionally, with low yields compared to world averages, the region may benefit from increased international focus -- in terms of multilateral agronomic development -- and an increased focus from the private sector outside the region that is seeking to develop new resources."

In contrast to falling acreage levels and forecast drop in production in the United States, Indian cotton production continues to break records. Production in 2007-08 is likely to rise around 10% to more than 24 million bales, which represents an 83% increase over the previous 10 years, though growth is forecast to slow to 5% in 2008-09.

"The main reason for the success of India's cotton program has been the implementation of a government program that targeted improvements in seeds, extension services, marketing infrastructure and processing facilities," said Whitehead.

Consumption

The economic slowdown, which is forecast through at least 2008, is likely to see the demand for cotton affected more than most major soft commodities. Why?

• The rising cost of food, brought on by higher grain and oilseed prices, leaves less income available for textile purchases.

• Cheaper artificial fibers are becoming more attractive. After growing by an average of more than 7% the prior three years, global cotton consumption growth is forecast to slow to less than 2% in 2007-08. With the economic slowdown forecast to continue for most of 2008, at least, consumption growth in 2008-09 could fall further to 1%. Despite this, forecast economic growth from 2009 is likely to see consumption growth begin to recover.

• Global cotton consumption continues to face competition from artificial fibers on a number of fronts. Despite synthetic fibers becoming more expensive on the back of oil prices, the sharper growth in cotton prices has made synthetic alternatives a more attractive proposition for mill use and retail consumption -- particularly in developing countries.

• Technological advances in artificial fibers, making them increasingly attractive in comparison to cotton across all demographics.

Outlook

"Assuming that current trends, in terms of strong demand and upward price pressure for grains and oilseeds continues into 2009, it would be reasonable to predict that 2009-10 U.S. cotton acreage is unlikely to see a major increase, if any increase at all," said Whitehead. "However, as the economic slowdown eases, textile demand is likely to strengthen again, and with it demand for cotton."

Globally, the United States is in a strong position to maintain a viable cotton growing segment. Developing countries such as China and India are likely to lose acreage to expanding food crops and urbanization. Additionally issues of the availability of water in places such as Australia, Uzbekistan and Africa, place questions on the viability of their long-term crop.

"So, as global cotton prices react to any future cut in supply, U.S. cotton growers will be ideally placed to benefit," said Whitehead.