COTTON AND WOOL YEARBOOK November 27, 1996 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- COTTON AND WOOL YEARBOOK is published annually by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. CWS-1996. Please note that this release contains only the text of the COTTON AND WOOL YEARBOOK--tables and graphics are not included. Printed copies and diskettes of this yearbook are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #CWS-1996, $15. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- CONTENTS Summary U.S. Cotton Situation and Outlook Foreign Cotton Situation and Outlook U.S. Wool Situation and Outlook Foreign Wool Situation and Outlook Mohair Manmade Fibers Special Article: Background and Perspective on U.S. Cotton Imports List of Tables Situation coordinator Leslie A. Meyer (202) 501-8528 Principal contributors Leslie A. Meyer (202) 501-8528 Stephen MacDonald (202) 219-1179 Robert Skinner (202) 219-0767 John V. Lawler Data Coordinator/Electronic Word Processing Mae Dean Johnson (202) 219-0506 Summary Based on November 1 crop conditions, U.S. cotton production in 1996 is forecast at 18.6 million bales, up from last season's 17.9 million and the third largest on record. The production rise this season is attributable to a rebound in the national average yield. While planted area to cotton fell 16 percent to 14.2 million acres, the national average yield is forecast to jump 30 percent to 698 pounds per harvested acre, only 10 pounds from the record. Harvested area is estimated at 12.8 million acres, resulting in an above average abandonment rate of 10 percent. U.S. cotton exports in 1996/97 are forecast to fall 24 percent from last season to 5.8 million bales. Larger foreign supplies, which have been building over the past 2 seasons, have resulted in greater price competition for U.S. cotton this season. In addition, import demand by China, a major U.S. market, is forecast lower. With the increased competition, coupled with a decline in world cotton trade, the U.S. share of the global market is projected to diminish from 28 percent in 1995/96 to 22 percent this season. U.S. mill use of cotton in 1996/97 is projected to rise after experiencing its first decline in 5 years last season. Mill use is forecast to reach 11 million bales, 4 percent above 1995/96. Abundant supplies at lower prices and rising cotton textile exports are expected to support mill consumption. In 1996, cotton textile exports are expected to advance for the 12th consecutive year, reaching the equivalent of 3 million bales. In contrast, cotton textile imports are anticipated to weaken for the first time since 1988. In 1996, these imports could fall to 8 million bale equivalents and thus narrow the cotton textile trade deficit. Meanwhile, total domestic cotton consumption (mill use plus net textile trade) will likely decrease for the 2nd consecutive year, with per capita consumption declining below 1995's 30 pounds. U.S. cotton supplies in 1996/97 will once again include a relatively large quantity of imports, as raw cotton purchases made late last season are still making their way into the United States. Imports are projected at 500,000 bales for 1996/97, up from 408,000 last season. U.S. total supplies are estimated at 21.7 million bales. Meanwhile, total use is forecast at 16.8 million bales, 8 percent below 1995/96. Based on these supply and demand estimates, U.S. ending stocks for 1996/97 are projected at 4.9 million bales. With U.S. stocks expected to rise over 2 million bales this season, the stocks-to-use ratio is estimated at 29 percent. World cotton production in 1996/97 is forecast to decline to 87 million bales, 5 percent below last season's outturn. Foreign production is projected at 68.4 million bales, 7 percent lower than in 1995/96. Smaller area and lower yields account for the decrease in foreign production. Among the major foreign producers, 1996/97 output is expected to fall significantly in China, Pakistan, and Uzbekistan. However, much larger production is anticipated in African Franc Zone and Southern Hemisphere countries. World consumption is projected to rise marginally to 85.7 million bales in 1996/97, with foreign consumption rising for only the second time since 1989/90. While consumption in China, the largest consumer of cotton, is forecast unchanged at 19.8 million bales, India, the second largest consumer, is expected to use 11.8 million, 3.5 percent above 1995/96. Gains in Europe are also anticipated this season. World cotton exports in 1996/97 are expected to decline 4 percent to 26.3 million bales. However, foreign exports are forecast up 4 percent from last season to 20.5 million bales, as rising foreign stocks during the past 2 seasons are expected to permit higher exports by a number of countries. Australia, Argentina, and African Franc Zone countries provide the largest increases, while Pakistan's reduced crop in 1996/97 will limit their exportable supplies. Despite a decline in world cotton production and a slight increase in consumption, world stocks are projected to build to 36.9 million bales, 3.5 percent above last season. The United States is responsible for the rise as foreign stocks are forecast to decline 1 million bales in 1996/97 to 32 million. A large decline is expected in China, with lower ending stocks also forecast for India, Uzbekistan, Pakistan, and Turkmenistan. China will hold 38 percent of the world's cotton stocks at season's end, down from 42 percent in 1995/96. U.S. raw wool production in 1996 is estimated at 30 million pounds, clean, 10 percent below last year and about half the production of the early 1980's. Wool imports also are projected down this year, at 80 million pounds, due to weaker mill demand this season. Although carryover supplies are forecast to decline to 31 million pounds, the lowest in over 25 years, farm prices are expected to average near 70 cents per pound, 34 cents below 1995. Sales of nearly 700,000 bales from the Australian wool stockpile have pressured U.S. and world prices this season. U.S. Cotton Situation and Outlook U.S. Cotton Review, 1995/96 The 1995/96 cotton season began with U.S. stocks at a relatively low 2.65 million bales, 25 percent below the previous year and the smallest since 1991/92. The low stock situation, which was brought about by the dramatic rise in demand in 1994/95, pushed the U.S. average farm price to its highest since 1980/81. In 1994/95, total demand for U.S. cotton reached new heights, more than offsetting 1994's record crop, and subsequently required a zero-percent acreage reduction program (ARP) for 1995/96. Producers responded to the relatively high cotton prices in 1995, and area planted to cotton exceeded 16.9 million acres, the largest since 1956. Plantings were delayed however, as rain and cool temperatures occurred in the Delta and West, while dry conditions in the Southwest postponed planting there. Then, crop development was hampered by hot, dry conditions in the Southeast and Delta. Insect damage was also extensive in the Delta region. In addition, cool, wet harvesting conditions lowered yields. Despite these problems in 1995/96, abandonment was a relatively low 5.5 percent, resulting in harvested area of 16.0 million acres. However, the national average yield was only 537 pounds per harvested acre, the lowest since 1983/84. With the largest harvested area since 1955, the United States produced its second largest cotton crop since 1937. U.S. production reached 17.9 million bales in 1995/96, about 9 percent below the previous year's record. With demand anticipated to more than offset production, U.S. cotton prices remained strong throughout the season. Meanwhile, foreign production reached a 4-year high in 1995/96, increasing exportable supplies dramatically. This moved world cotton prices lower, and, with the U.S. price unable to follow, significant volumes of raw cotton imports into the United States became a reality. While cotton imports trickled in early in the season as in past years, large quantities were reported during the last 3 months of 1995/96. In fact, during July 1996, the United States was a net importer of raw cotton for the first time since September 1944. For the 1995/96 season, U.S. raw cotton imports totaled 407,595 bales, the fifth highest on record and the highest since 1928/29. Of the total imports, about 80 percent came from Uzbekistan and Argentina. In 1995/96, U.S. cotton demand outpaced production for the third consecutive season, totaling 18.3 million bales. Although 11 percent below 1994/95's record U.S. cotton demand, the 1995/96 level was the third highest ever. U.S. mill consumption last season totaled 10.6 million bales, 5 percent below 1994/95 but the second highest in 45 years. Demand for U.S. cotton textiles and apparel remained strong both here and abroad, aided in part by the North American Free Trade Agreement (NAFTA). Likewise, U.S. cotton exports declined in 1995/96 to 7.7 million bales, 18 percent below 1994's exceptional level. In 1995/96, world trade decreased as foreign producers' crops improved which allowed them to satisfy more of their own cotton needs as well as compete with U.S. cotton. Despite the reduction, U.S. exports were the fourth largest in 40 years. In addition, U.S. exports, as well as domestic mill use, were dampened by the high U.S. cotton prices experienced in 1995/96. With a U.S. cotton supply of 21.0 million bales in 1995/96 and total use reaching 18.3 million, stocks at the close of the season declined slightly. Ending stocks were placed at 2.6 million bales, a stocks-to-use ratio of only 14 percent and the lowest absolute level since the 1990 season. As a result, producer prices improved. In 1995/96, the average upland farm price was 75.4 cents per pound, compared with 72.0 cents in 1994/95. The average extra-long staple (ELS) price was $1.228 per pound, compared with $1.025 in 1994/95. The 1995 U.S. cotton crop was the last produced under the auspices of the cotton program outlined in the 1990 Food, Agriculture, Conservation, and Trade (FACT) Act. Under the FACT Act, ARPs were used in an effort to help control cotton supplies and reach a targeted ending stock level. However, with the passage of the 1996 Federal Agricultural Improvement and Reform (FAIR) Act, these controls and legislated targets, along with "crop specific" base acreages, were eliminated to provide a more market-oriented farm program. The FAIR Act encourages producers to respond more to the marketplace with increased planting flexibility, relying less on the fixed, declining government payments which are not affected by either planted acreage or market prices. The FAIR Act is in place through the 2002 crop year. Supply Outlook for 1996/97 U.S. cotton supplies at the beginning of 1996/97 were 2.6 million bales, their lowest since the 1991 season. Prices remained relatively high but with the new farm legislation in place this season, competing crop prices played a vital role in the area planted to cotton in 1996. Record grain prices attracted area away from cotton as many producers, those who had the option of another crop, could limit their risk by planting more of the lower-cost grain crops. Many producers took advantage of the new flexibility provisions as U.S. cotton area fell 16 percent from 1995 to 14.2 million acres. Upland area this season is near 14.0 million acres, down from 16.7 million a year ago. On the other hand, ELS area rose to 264,000 acres, nearly 50,000 above 1995, as high ELS prices encouraged the increased plantings. Despite the reduction in total area in 1996, the national average abandonment rate is forecast well above last season. Based on November estimates, the rate is estimated at 10.3 percent, or approximately 1.4 million acres. With the higher abandonment, harvested area, at 12.8 million acres, is the smallest in 4 years. This season, cotton crop conditions have been favorable and relatively stable despite some unusually wet weather in parts of the Cotton Belt. Based on November 1 conditions, the 1996 U.S. cotton crop is forecast to approach 18.6 million bales, nearly 4 percent above last season (figure 1). The production rise is attributable to a rebound in the national average yield. The U.S. cotton yield is currently estimated at 698 pounds per harvested acre, up 161 pounds from last season and only 10 pounds from the 1994 record. Upland production is forecast at 18.0 million bales in 1996, with the average yield estimated at 691 pounds per harvested acre (table A). While expected production is higher in all regions except the Southwest, yields are much improved for each region from a year ago. By mid-November, over 70 percent of the cotton crop had been harvested. ELS production is forecast at 567,000 bales, 54 percent above 1995. The rise in the crop is due to both higher acreage and yields (table B). While the area jump was attributable mainly to California, yields were as good or better than 1995 in all four States. The ELS yield is estimated at 1,039 pounds per harvested acre, the highest average yield on record for ELS cotton. Total U.S. cotton supplies in 1996/97 will once again include a relatively large quantity of imported cotton, as purchases made late last season are still making their way into the United States. Raw cotton imports are projected at 500,000 bales for the 1996/97 marketing year, up from 408,000 bales last season. Record U.S. raw cotton imports occurred in 1919/20 when 700,000 bales were recorded. During the first 2 months of this season, imports already had reached 350,000 bales, with the major suppliers including Uzbekistan, Argentina, Australia, and Mexico. However, more recent customs data indicate that the pace of imports into the United States has slowed considerably. See the special article in this issue on U.S. cotton imports. Nevertheless, total U.S. cotton supply is projected at 21.7 million bales, 3.5 percent above last season. Demand Outlook for 1996/97 The U.S. cotton demand outlook points to a continued decline in total U.S. cotton offtake. This season, total demand is projected at 16.8 million bales, 8 percent below 1995/96 and 18 percent below 1994/95. U.S. exports are responsible for the bulk of this retrenchment as foreign supplies, which have been building over the past two seasons, have become more competitive with U.S. cotton on the world market. The competitiveness of world prices is evident as they have fallen 15 cents per pound since October 1995 (table C). The A Index averaged near 76 cents per pound in October, compared with 91 cents last year, while the adjusted world price (AWP) has declined from about 77 cents to near 61 cents. During this time period, U.S. cotton prices have declined about a dime. The relatively high U.S. prices, which aided the sale of foreign cotton to U.S. mills recently, has also stymied prospects for U.S. cotton exports thus far in 1996/97. U.S. exports are projected to fall 24 percent from 1995/96 to 5.8 million bales (figure 2). Although ELS cotton exports are forecast to rise this season to 425,000 bales, upland shipments are expected to decline 2 million bales to 5.4 million. Although the world cotton import demand is expected to decline this season, the foreign competition has also eroded the U.S. share of the export market. In 1996/97, the U.S. share of world trade is projected at 22 percent, down from 28 percent in 1995/96 (table D). U.S. export shares to major importers also are projected to fall from last season, but the United States still is expected to supply more than half the import demand of China, Japan, and Mexico. Based on U.S. Export Sales data through mid-November, approximately 835,000 statistical bales of upland cotton had been shipped, compared with 1.1 million a year earlier. However, commitments (shipments plus outstanding sales) for 1996/97 are lagging the pace set last season. Upland commitments through mid-November were 3.5 million bales, compared with 6.3 million in 1995/96. On the other hand, ELS shipments and total commitments are running ahead of last season's pace. Exports had reached 62,000 bales, with commitments totaling 354,000, 24 and 27 percent above 1995/96, respectively. U.S. cotton mill consumption is projected to rise in 1996/97 after experiencing its first decline in 5 years in 1995/96. The latest estimate places 1996/97 mill use at 11 million bales, up 400,000 bales (nearly 4 percent) from last season (figure 3). Abundant supplies at lower prices this year, coupled with an improving outlook in retail consumer demand for cotton products, should provide for the gain in U.S. mill consumption. Upland mill use in 1996/97 is projected at 10.9 million bales, while ELS consumption is expected to reach 105,000 bales. Based on the first 3 months of data from the Department of Commerce, the seasonally adjusted annual rate of cotton consumption averaged 10.8 million bales. Consumption, however, is expected to improve over the remaining 9 months to reach the current estimate. Actual cotton mill use for August through October 1996 reached 2.84 million bales, compared with 2.79 million a year earlier. Although cotton prices have varied widely during the past 12 months, the variation has not been as dramatic as the rise and fall experienced in 1995 (figure 4). During the first 3 months of 1996/97, raw-fiber equivalent cotton prices averaged about 91 cents per pound, compared with $1.03 a year ago. While cotton prices have fallen 15 cents since the spring, polyester staple prices have declined a dime and remain below that of cotton. Despite this, cotton's share of fiber use on the cotton system is near that of last season. During the first 3 months of 1996/97, cotton's share averaged 78 percent, equal to a year earlier and similar to 1995/96's 78.1 percent. Based on these projections of U.S. cotton supply and demand, ending stocks for the 1996/97 season are estimated at 4.9 million bales (figure 5). With U.S. stocks anticipated to jump over 2 million bales from the beginning level, the ratio of stocks-to-use is projected at 29.2 percent, compared with the previous 5-year average of 20.1 percent. U.S. Textile Trade and Domestic Consumption While U.S. textile trade is near that of 1995 in overall volume, the trade deficit has declined in 1996 as exports have continued to expand with imports falling from a year earlier. Textile exports during the first 9 months of 1996 reached 2.5 billion (raw-fiber equivalent) pounds, compared with 2.3 billion in 1995. Meanwhile, textile imports through September 1996 totaled 5.9 billion pounds, compared with 6 billion for the same period in 1995. Although imports remain much larger than exports, the textile trade deficit has decreased 10 percent through the first 9 months of 1996 compared with 1995. Cotton accounts for 59 percent (2 billion pounds) of the total textile trade for January through September 1996. However, cotton textile exports are running 12 percent ahead of a year earlier and surpassed 1.1 billion pounds. On the other hand, cotton textile imports are 2 percent below the first 9 months of 1995, reaching 3.1 billion pounds so far this year. For calendar 1996, cotton textile exports are expected to rise for the 12th consecutive year while imports are anticipated to weaken for the first time since 1988 (figure 6). Exports for the 12 months will likely approach 3.1 million bale equivalents (1.5 billion pounds), 12 percent above 1995. At the same time, cotton textile imports may decline to 8.1 million bale equivalents (3.9 billion pounds), 4 percent below last year. With textile exports improving and the anticipated decline in imports, the cotton textile trade deficit is expected to fall for the first time in 6 years to the equivalent of 5 million bales of raw cotton. Total domestic consumption (mill use plus net textile trade) of all fibers is expected to decline for the 2nd year in a row in 1996. Based on data for the first 6 months, domestic consumption of all fibers totaled nearly 10 billion pounds. Cotton accounted for roughly 38 percent of the total, or approximately 3.8 billion pounds, while manmade fibers contributed 58 percent, or 5.8 billion pounds. By year's end, domestic consumption of cotton is expected to fall short of the 7.9 billion pounds consumed last year (figure 7). Likewise, the per capita consumption of cotton is anticipated to drop below 30 pounds to perhaps the level used in 1993. In 1995, per capita cotton consumption reached 30.1 pounds, with 19.7 pounds produced in U.S. mills (table E). Foreign Cotton Situation and Outlook World Production and Stocks Rise in 1995/96 World cotton supply and demand responded to 1994/95's tight supply and high prices in 1995/96 with rebounding area and production, slowing imports and consumption, rising ending stocks, and falling prices (table F). While some of the biggest changes recorded for any country during 1995/96 occurred in the United States, foreign cotton area rose dramatically. Outside the United States, the variability of area for cotton tended to increase more than for other crops since the 1970's. During 1995/96, world cotton area soared to a near-record 35.4 million hectares (ha), a level last seen at the beginning of the 1950's. U.S. area grew the most, by over 1 million ha, but India's harvested area increased nearly 800,000 ha, and Pakistan's by 400,000. Argentina, Turkey, and Tanzania each had area increases between 150,000 to 250,000 ha. Cotton area shrank in China by about 100,000 ha, as did area in Brazil and Turkmenistan. Foreign area totaled 29 million ha, and foreign production rose 7.8 million bales to 74.7 million (figure 8). China's crop grew 2.0 million bales in 1995/96. Although on a smaller area, China's cotton crop shifted into higher yielding regions--west to the irrigated area of Xinjiang, and south, out of Shandong. Shandong was China's largest producing province only 3 years earlier, but persistent bollworm attacks significantly reduced the crop's attractiveness. At 21.9 million bales, China's 1995/96 crop was its third largest ever, according to China's State Statistical Bureau (SSB). Many outside observers questioned the high yields and large cotton supplies suggested by such a large production figure. However, since China's import and export decisions follow changes in domestic cotton availability only with considerable lags, it is difficult to second-guess the SSB's estimates with any degree of certainty. Changes in cotton prices in China during 1995/96, and other indications of abundant supplies, may reflect either a large crop or the impact of several years of large imports. In most countries, yields generally rose as well as area in 1995/96, and production increased in all but a handful of countries. The largest decline among foreign producers came in Brazil where drought, dramatically tightened credit policies, and surging world prices for soybeans coincided with 1995/96 planting. Yields fell as well as area, and Brazil's crop declined 735,000 bales to 1.8 million. Turkmenistan's production also fell, down 458,000 bales to 1.2 million bales. The reliability of Turkmenistan's official statistics is widely believed to have deteriorated in recent years, and some published sources suggest the 1995/96 crop was larger, much more similar to the preceding year's crop. However, the limited availability of cotton from Turkmenistan supports the lower figure. Turkmenistan also suffered a setback in grain production in 1995/96, following 5 years of steadily increasing crops. Smaller declines were also registered in cotton production in Azerbaijan, Tajikistan, and Uzbekistan, despite near-record world prices during the previous year. While the 1990's has brought profound economic changes to the former Soviet Union (FSU), the responsiveness of these important producers to world prices remains extremely weak. Fortunately, the FSU is unlikely to repeat the destablizing role it played during the early 1990's, since it is now much less important as a consumer and stockholder of cotton (appendix table 25). Foreign Consumption Grows in 1995/96 World consumption fell in 1995/96 for the 4th consecutive year. Foreign cotton consumption rose, however, and the U.S. share of world cotton consumption contracted for the first time in more than a decade (figure 9). Foreign consumption increased 500,000 bales to 74 million. Cotton producing countries accounted for most of 1995/96's consumption gains, but Eastern Europe's consumption also rose. Smaller gains were reported in Venezuela, Indonesia, and Canada. The biggest increase came in India which expanded 850,000 bales to unseat the United States as the world's second largest consumer of raw cotton. China, the world's largest consumer, reduced its use 400,000 bales to 19.8 million in 1995/96. While China's supplies continued improving in 1995/96--with beginning stocks, production, and imports all above historical norms--consumption fell for the third consecutive year (appendix table 28). Government efforts to rein in inflation and restructure state-owned companies hurt China's textile output. Furthermore, years of steadily rising prices for cotton in China encouraged increased substitution of man-made fibers (MMF). Consumption rose in Pakistan, the world's fourth largest consumer of cotton, as rebounding cotton supplies helped consumption accelerate. Pakistan's cotton consumption increased every year between 1983 and 1995, but the rate of growth slowed considerably during 1991-94 as Pakistan's production collapsed from 10 million to 6.3 million bales. Rebounding yields in 1995/96 boosted production, exports, and consumption (appendix table 30). Similarly, larger crops in Turkey and Mexico also helped boost their consumption as well as exports. Turkey and Mexico also benefited from deepening trade ties with the European Union (EU) and the United States, respectively, their most important markets for textiles. With growing textile imports from Turkey--and elsewhere--consumption in the EU continued the downward trend it embarked upon during the latter half of the 1980's. The EU is just one of a group of large markets with chronically shrinking textile industries and falling cotton use during 1995/96; Japan, Russia, and Korea also used less cotton. Egypt and Thailand have been on a declining trend only since 1990, and, while their long-run prospects are presumably better than in countries like Japan, 1995/96 was another bad year for cotton use in these two countries. World Trade Fell in 1995/96 With consumption and imports shrinking in most of the world's top importing countries in 1995/96, world trade shrank nearly 1 million bales to 27.4 million. China, the world's largest importer, cut imports by 1 million bales; Japan, Korea, and Thailand cut imports by 200,000 bales each; the EU by 500,000 bales; and Turkey, India, and Pakistan each imported substantially less. Surprisingly, one of the world's largest year-to-year increases in imports came from the United States, which matched Brazil with a 388,000-bale gain. The next largest was Indonesia's 75,000 bales. On the export side, shipments from most countries increased in 1995/96, with the notable exceptions of the largest exporters, the United States and Uzbekistan. Pakistan's exports rose by 1.4 million bales and India's by 580,000 bales. Turkey and Mexico increased their exports as did a number of other countries, including: Syria, Zimbabwe, Greece, Argentina, Franc Zone Africa, Sudan, and Tanzania. Foreign ending stocks jumped 5 million bales in 1995/96; however, China accounted for much of this increase. Even excluding China, ending stocks rose 1.4 million bales, and as a share of consumption climbed from 32 percent in 1994/95 to 34 percent, just below the 35-percent average of the preceding 20 years. Not surprisingly, world cotton prices fell during much of 1995/96, reducing incentives for planting in the coming year. Cotton's rising ending stocks contrasted with tightening supplies for grain. Grain's world ending stocks shrank nearly 6 million tons in 1995/96, and stocks as a share of consumption fell to 14 percent, perhaps its lowest ever. Not surprisingly, grain prices soared, further reducing incentives for planting cotton in 1996/97. United States and China Cut Area in 1996/97 Outside of the United States and China, cotton area continued to compete well against grains in 1996/97, with cotton area relatively stable as area for grains increased. During 1995/96, foreign area outside China and the FSU surged 11.6 percent to 23.5 million ha. In 1996/97, virtually no decline is foreseen, despite the previous year's real decline in world cotton prices of more than 10 percent and soaring world grain prices. Grain area rose 3.3 percent in the same group of countries. Virtually every important cotton producer increased its grain area in 1996/97, but only a handful planted less cotton. World cotton area is forecast 6 percent lower in 1996/97, at 33.2 million ha, but foreign area is only expected to fall 3 percent to 28.1 million. India cut cotton area in 1996/97, but barely. While India's grain plantings rose 1 million ha and other oilseed plantings increased 200,000 ha, cotton area fell only 150,000 ha, giving up only a small portion of the previous year's huge cotton area expansion. While cotton area shrank in northern producing areas--particularly n Punjab--in response to increases in grain, cotton plantings rose in central areas at the expense of soybeans. As a result, little change is foreseen in production, at 12.2 million bales. In China, by contrast, area fell 800,000 ha to 4.6 million ha. Area fell to its lowest since 1986 as sluggish demand by textile mills coincided with China's third largest harvest ever during 1995/96, halting procurement, increasing the use of IOU's, and cutting quality premiums. China's producers began planting in 1996/97 with reduced price expectations for the first time since 1992, and acted accordingly. Yields are also expected to weaken due to reduced incentives for input use, and the harvest is expected to fall 4.4 million bales to 17.5 million. While China's 800,000 ha change in area seems large, the United States' 1.3 million ha change is about 60 percent larger. For the second consecutive year, the United States is expected to undergo the largest year-to-year change in cotton crop area, again in excess of 1 million ha. However, despite this massive 2-year shift, the variability of U.S. cotton area in the 1990's has shrunk since the 1980's. The variability of foreign area cotton continues to grow, and has grown more steadily than other crops (figure 10). For both the United States and foreign producers, area variability of most crops has shrunk during the 1990's, particularly compared with the 1970's. Yields Drop in Pakistan and Central Asia Pakistan's area rose in 1996/97 as rebounding exports during 1995/96 led to substantially lower stocks--despite rebounding production--and strong domestic prices during 1996/97 planting. However, yields are expected to fall substantially, losing all the ground regained during the last 2 years. Apparently, leaf- curl virus was once again a problem, and heavy, widespread, and unusually early infestations of white fly damaged the crop. Despite higher area, the crop is expected to be 1.1 million bales smaller than the year before, at 7.1 million bales. Deteriorating weather is expected to cut production from Greece to Uzbekistan in 1996/97. In Central Asia, cooler weather than the year before delayed planting and increased reseeding compared with 1995/96, and continued lower than average temperatures in at least some parts of Uzbekistan also reduced the crop. Uzbekistan's production is expected to fall 640,000 bales to 5.1 million in 1996/97 and Turkmenistan's 150,000 bales to 1 million. Excessive late-season rains are expected to help cut Greece's and Turkey's crops more than 350,000 bales from the year before. Economic difficulties and competing crop prices are expected to lead to smaller cotton area in South America in 1996/97, with declines foreseen in Brazil, Paraguay, and Argentina. While yields are expected to partly rebound due to more normal weather, a complete recovery from 1995/96's losses is not foreseen. Despite contracting area in all the countries mentioned above (except Pakistan), foreign cotton area outside of China was virtually unchanged in 1996/97 due to widespread gains in smaller producers. Higher area and yield are expected in many regions, including: Australia, Egypt, Franc Zone Africa, Spain, Sudan, and Uganda. Consumption Continues Growing Foreign consumption is expected to rise in 1996/97, only for the second time since 1989. At 74.7 million bales, foreign consumption will be only 1 percent above the year before, but this represents a significant improvement from the average 1 percent contraction registered every year between 1989/90 and 1994/95. While importers with chronically shrinking textile industries--including the EU, Japan, Russia, and South Korea--are expected to consume less cotton again, the declines are generally foreseen to be smaller. Pakistan is also expected to consume less cotton, due in part to its reduced crop. China's cotton consumption is expected to remain at 19.8 million bales as near-record beginning stocks of cotton and a recent relaxation of some of the constraints on state-owned enterprises help 1996/97 use recover from a slow start. While the textile industry's financial troubles and increased use of MMF has cut China's share of world cotton consumption (23 percent) to its lowest level since the 1970's, China remains the world's largest consumer of cotton. India, the world's second largest consumer of cotton, is expected to increase its use 3.5 percent, giving it nearly 14 percent of expected world consumption in 1996/97. While India's consumption is expected to grow at less than half of the previous year's torrid 8 percent rate, its 400,000-bale gain will be the largest of any foreign country. India's experience is in some respects more indicative of foreign cotton consumption trends in the 1990's than the other countries mentioned above. While foreign cotton consumption fell steadily during the 1990's until 1995/96, all of this 4.6-million bale loss can be attributed to China, the former Soviet Union, and Eastern Europe. Foreign consumption, excluding these regions, has grown at a relatively steady 1.5 percent rate every year since 1986/87, about what is expected in 1996/97 (figure 11). World Trade Continues Shrinking With China's cotton supplies at their highest since the mid-1980's, China is expected to relinquish its place as the world's largest importer in 1996/97, importing 1.3 million bales less than during the year before. World trade is expected to shrink 1.1 million bales, to 26.3 million in 1996/97, as increased imports by Turkey, Brazil, and the United States only slightly offset declines in China, Russia, Korea, and Japan. Foreign exports are expected to rise less than 800,000 bales in 1996/97, to 20.5 million bales. While larger crops and beginning stocks are expected to permit larger exports by a number of countries, Pakistan is expected to export 970,000 fewer bales than the year before. At 600,000 bales, Pakistan's exports are again forecast well below the levels considered normal before its recent problems with pests and disease. Greece is the only other major net-exporting country where declining exports are foreseen for 1996/97, down 200,000 bales to 1 million. Foreign ending stocks are expected to shrink in 1996/97, down about 1 million bales to 32 million, or 43 percent of expected foreign consumption. The largest decline expected is China's 700,000 bale decline to 14.1 million bales. However, even excluding China, tightening foreign ending stocks and stocks-to-use are foreseen, in marked contrast to rebounding stocks in the United States. Lower ending stocks in India, Uzbekistan, Pakistan, and Turkmenistan--all competitors with U.S. exports-- are expected. However, excluding these countries, as well as China from the foreign total, gives a smaller group where ending stocks are expected to continue to rise, both in absolute magnitude and as a share of consumption in 1996/97, as importers take advantage of falling prices to rebuild the stocks eroded during the past few years. Larger Foreign ELS Production and Use According to the International Cotton Advisory Committee's (ICAC) ELS estimates for foreign producing countries, both 1995/96 production and consumption improved from the low levels of the previous year. ELS production in 1996/97 is projected to jump 30 percent to 3.1 million bales. Most major producing countries, with the exception of Central Asia, are expected to expand their production this season (table G). Among foreign producers, consumption is projected to rise only 4 percent to 2.1 million bales. This, however, comes after an 8-percent gain in 1995/96. Indications are for consumption to rise in all countries with the exception of China, where it is projected 9 percent lower. Based on these estimates, the consumption-to-production ratio for foreign producers is expected to fall from 84 percent in 1995/96 to 67 percent this season. In 1996/97, the ICAC projects foreign ELS exports to more than double the level achieved in 1995/96. Ample exportable supplies are foreseen this year as stocks are likely to rise for the third consecutive season. Although U.S. ELS exports are seen rising this year, the U.S. share of world ELS exports is projected down from 44 percent in 1995/96 to slightly over 30 percent. U.S. Wool Situation and Outlook Wool Production and Sheep Numbers Decline With the elimination of wool incentive payments, the U.S. wool growing industry continues its contraction. Sheep numbers on January 1, 1996, were 6.2 million head, down 3 percent from a year earlier. Sheep shorn during 1996 totaled 7.3 million, compared with 8.1 million last year. Production is currently estimated at 30 million pounds, clean (56.4 million, greasy) for the 1996 marketing year (table H). Lower sheep numbers, combined with a slight drop in expected yield to 7.7 pounds per head, resulted in a production decline of 10 percent from 1995. Production this year is the lowest on record and about half the level of the early 1980's (figure 12). During 1995, U.S. wool imports were nearly 89 million pounds, clean (table I). This season imports are forecast at 80 million pounds, down 10 percent. Shipments through the end of September have reached 61 million pounds with fine wool accounting for 71 percent of the total. Imports of unimproved and other grades not finer than 46's were 18 million pounds through September. Shipments from New Zealand represented 70 percent of these grades while Australia accounted for 86 percent of the finer wools. Total U.S. supplies are forecast at 176 million pounds, clean, 9 percent below 1995 and the lowest since 1985. Raw wool mill consumption is forecast at 140 million pounds, slightly below 1995. Mill use during the first 9 months of 1996 totaled 97.4 million pounds. Apparel wool, at 73.2 million pounds, was 12 percent below 1995 consumption. Carpet wool mill use about matched the corresponding period of 1995 at 9.2 million pounds (table J). The woolen system used 42 million pounds and the worsted system 46 million pounds during January through September of this year. Wool top production in the third quarter was 12.3 million pounds, compared with 15.2 million during second-quarter 1996. Top production in the third quarter was 27 percent below 1995. Raw wool exports during the first 9 months of 1996 totaled 3.9 million pounds, clean, 35 percent below the corresponding period of 1995. Shorn wool shipments were 2.1 million pounds and not shorn (pulled) exports were 1.0 million. The majority of shorn wool exports went to Germany, Italy, Mexico, and Uruguay. Exports of not shorn wool went primarily to the United Kingdom, Uruguay, Mexico, Canada, and India. Exports of wool top during the first 9 months of 1996 were 8.4 million pounds, 13 percent below a year earlier. The average price was $2.58 a pound, compared with $3.39 last year. The value of the shipments totaled $21.6 million. The majority of the shipments went to Mexico, China, and Korea. Top imports were 2.8 million pounds, 24 percent below January-September 1995. Australia was the largest source, accounting for 77 percent of wool top imports. U.S. prices for clean, mill-delivered territory raw wool, finer grades 64's and 62's moved higher during the first 4 months of the year, averaging $1.97 and $1.82 per pound during March and April, respectively. However, since then prices have weakened slightly. The 64's averaged $1.93 in October and the 62's averaged $1.63, the lowest this year. The 60's and 58's also set seasonal lows during October, averaging $1.48 and $1.38 per pound, respectively. The 56's and 54's have declined all season, averaging $1.25 and $1.15 per pound, respectively. Domestic prices of Australian raw wool 80's and 70's increased each month through September. The 80's averaged $3.88 per pound and the 70's averaged $3.46. Prices declined in October about 50 cents per pound from the September highs. The 64's established a seasonal high in June of $2.45 per pound. Since then prices have weakened, averaging $2.20 during October. Grade 58's prices have declined throughout the season to an October low of $1.80 per pound. Foreign Wool Situation and Outlook Lower Demand, Weaker Prices Surround 1995 Season Foreign wool production is experiencing a similar adjustment process which has been occurring in the United States. In 1995, foreign wool production fell 6 percent to 3.2 billion pounds, clean. World sheep numbers are estimated at 1 billion head, indicating the 6th consecutive year of decline and the lowest since the late 1970's. Australian production, at 1 billion pounds, dropped to the lowest level since the early 1980's. New Zealand wool production declined to 438 million pounds, down 7 percent from a year earlier as sheep numbers continue to drop. Increased production is estimated for China (304 million pounds), but production in the former Soviet Union is forecast down 25 percent to 284 million pounds. The region's cumulative decline in wool production since 1991 was 47 percent. Foreign exports of raw wool, at 2.5 billion pounds, greasy, dropped 16 percent from 1994 shipments. Lower exports occurred for all of the major wool producing countries except South Africa. Australian wool exports declined 9 percent to 833 million pounds, clean, the lowest level since the collapse of the Reserve Price Scheme in the 1990 season. Compared with a year earlier, the total value of exports, at $A3.2 billion, was 15 percent lower, reflecting reduced volume shipped at lower prices. China/Hong Kong accounted for 26 percent of Australian wool shipments and were 2 percent above 1994 levels. Italy was the second largest export destination in 1995, purchasing 15 percent of Australia's shipments, 4 percent lower than a year earlier. Significantly lower shipments to Japan, Korea, and France accounted for the overall decline in Australia's exports in 1995. Foreign consumption and imports were also lower in 1995 than the previous season. Foreign mill use dropped to 3.3 billion pounds, clean, the lowest since the 1977 season. Lethargic mill demand in major textile producing countries, such as China, Germany, United Kingdom, Italy, and Japan resulted in lower imports from the major producing countries. Weak retail sales of wool apparel and textiles, combined with slower economic activity abroad, resulted in reduced mill use and import demand. While consumption was down 7 percent from a year earlier, wool imports declined 11 percent. Despite weak demand, world carryover supplies dropped for the fifth consecutive year (figure 13). World carryover at the end of the 1995 season is estimated near 1 billion pounds, clean. However, a substantial percentage of stocks is controlled by Wool International (WI) and not available to the market. WI, the body charged with selling down Australia's large wool stockpile, has sold over 2 million bales since the start of the 1991 season. The quarterly minimum disposal level has been 182,000 bales while the maximum level is currently 192,000 bales. Last August, representatives from Australia's wool industry changed the fixed release schedule of WI. Effective January 1, the quarterly minimum disposal rate will be lowered to 135,000 bales and will fall further to 90,000 bales a quarter from July 1997. The maximum disposal rate will be increased to 350,000 bales a quarter. In addition, the date of December 31, 2000, was set to have the stockpile completely eliminated. The increased flexibility of stockpile sales is expected to help reduce the downward pressure on prices. Next year to the extent possible, WI's sales objective will consider overall net returns to the Australian wool growing industry. Despite lower production, world wool prices trended lower throughout the 1995 season. The Australian market indicator (a weighted average index of 15 categories) averaged over A700 cents per kilogram at the beginning of the season (July-August 1995), then fell below A600 after January 1996. For the season, the market indicator averaged A619 cents per kilogram. The New Zealand market indicator mirrored Australia's price movements. It ranged between NZ445 and NZ543 cents per kilogram, averaging NZ501 cents for the season. The South African market indicator rose at the end of the season to over SA2,000 cents per kilogram (May and June), averaging SA1,758 cents during the 1995 marketing year. South Africa was able to export a larger share of their 1995 production and keep carryover supplies at more acceptable levels. Raw Wool Demand Prospects To Improve in the 1996 Season Initial projections for the 1996 marketing year suggest that world wool production could about match 1995 output of 3.2 million pounds, clean. Increased production in Australia, Argentina, and South Africa is likely to offset lower production elsewhere, primarily in the former Soviet Union and New Zealand. Demand for raw wool is expected to receive a boost from improved economic growth in Western Europe and Asia. At the same time, a likely decline in cotton and synthetic fiber prices relative to wool prices means that interfiber competition will remain strong. In Western Europe, assumed higher rates of economic growth (particularly in Germany) in 1996/97 are expected to increase retail consumption of wool apparel and textiles. Consumption in Japan is also expected to increase as economic recovery is sustained for a second year following several years of slow growth. An increase in retail demand in major wool consuming countries is likely to have an immediate impact on the demand for raw wool. Low stock levels and increased processing activity in Japan, Korea, and Taiwan would lead to an improved demand situation. In contrast, stocks held by processors in Western Europe are at more normal levels and activity remains somewhat depressed. Also, improved wool mill use in China is expected this season. In total, world wool consumption could reach 3.4 to 3.5 billion pounds, clean, in the 1996 marketing year, an increase of 4 to 6 percent. With improved consumption, trade prospects are also expected to increase. Raw wool exports during the 1996 season could reach 2.8 to 3.2 billion pounds, greasy. Larger shipments by Australia, Argentina, and South Africa could push world exports back to the level of trade achieved for the 1994 marketing year. With improved demand prospects and stable production, stocks are projected to decline modestly by the end of the season. However, with the revised stock release rates, world wool prices may remain relatively flat this season. Australian wool prices are projected to average near the 1995 season's average of A619 cents per kilogram. However, as the Australian stockpile becomes less of a price depressing factor, it should allow for industry expansion in the next 2-3 years. Mohair The U.S. mohair industry is experiencing major changes. Wool demand, lower yields caused by drought, and the elimination of incentive payments during 1996, have reduced production to 9.0 million pounds, clean (table K). This season's production is the lowest since 1983. Mohair imports between January and September totaled 42,898 pounds, clean. For the year, imports are forecast at 100,000 pounds. With beginning stocks of 2.5 million pounds, total 1996 supplies are estimated at 11.6 million. Despite reduced 1996 production, total supplies are 12 percent above 1995. Domestic mill use is forecast at 1.3 million pounds, clean, compared with 3.0 million consumed in 1995. However, the export market is projected to more than offset declines in domestic mill use. Mohair exports are projected to increase 75 percent to 8.6 million pounds, clean. During January through September 1996, mohair exports have reached 4.4 million pounds with the United Kingdom accounting for 46 percent of total shipments. Other major buyers included South Africa and India. Traditional markets for U.S. mohair, such as China, Belgium, and Japan, are expected to increase purchases during the latter part of 1996. Stocks at the end of the 1996 season are forecast to decline to 1.7 million pounds, clean, 32 percent below carry-in levels. Demand has been light, with producers electing to postpone sales since late September. Adult mohair prices began the season at $1.70 per pound, then rose to $2.00 in June. In July, choice fine kid hair brought $3.50 per pound. Mohair top exports during January-September 1996 totaled 2.3 million pounds, 76 percent more than a year ago. About 88 percent of the shipments were exported to India. Monthly prices ranged from $2.10 per pound to $3.80, averaging $3.12 for the 9-month period. The value of mohair top exports totaled $7.24 million. South African mohair production is also declining. During the 1996 summer sale (March-June), 5 million pounds of mohair were offered, with 90 percent sold to the trade. Mohair offerings were down 8 percent from 1995 and sales were off 3 percent. Winter sales (August-December) through the end of October have not been as strong, with 75 percent of the 5.3-million pounds of mohair bought by trade. In total, 8.5 million pounds of South African mohair have been sold this season, the lowest since 1990 and less than half the volume sold during the 1988 marketing year. This winter season, adult hair has traded between $SA26-27 per kilogram and fine kid prices have ranged between $SA42 and $SA53 per kilogram. Manmade Fibers The manmade fiber business in the third quarter of 1996 improved from the second quarter and from the third quarter of 1995. Total shipments in third- quarter 1996 were 2.53 billion pounds, 1.2 percent more than the second quarter and 4.4 percent above a year earlier. Production, at 2.57 billion pounds, was 5.2 percent greater than the second quarter and 4.7 percent more than a year ago (appendix table 48). Domestic shipments by fiber producers declined 2.2 percent from the second quarter but were 8 percent greater than a year earlier. Stocks at fiber producers' plants at the end of the third quarter, at 683 million pounds, were 4.2 percent above the second quarter and 0.7 percent more than last year. Second quarter 1996 domestic shipments of noncellulosic filament fibers, at 1.33 billion pounds, were 2.6 percent less than the second quarter but 5.2 percent above a year ago. Nylon domestic filament shipments were 458 million pounds, polyester filament shipments were 358 million pounds, and olefin filament shipments were 510 million pounds. Noncellulosic staple domestic shipments, at 907 million pounds, were less than 1 percent below the second quarter but 1.7 percent more than a year earlier. Nylon staple shipments were 220 million pounds, polyester staple shipments were 511 million, olefin staple shipments were 100 million, and acrylic staple shipments were 76 million. The carpet market continues to consume more fibers in facing and backing uses than other fiber markets (appendix table 49). In second-quarter 1996 (the latest data available), this market took 926 million pounds, 6.1 percent more than the first quarter and 9.8 percent above a year earlier. Noncellulosic carpet use accounted for more than 41 percent of total noncellulosic fiber domestic shipments. Nylon dominates the carpet market, constituting 53 percent of the total second quarter use of noncellulosic carpet fibers. Nylon staple carpet fibers were more than 94 percent of nylon staple domestic shipments, while nylon filament carpet fibers were 63 percent. Preliminary data for the third quarter indicate that about 518 million pounds of nylon were used in carpets, 6 percent above the second quarter and 5.7 percent more than a year earlier. The use of olefin fibers in carpet backing and facing in the second quarter was 389 million pounds, 12 percent above the first quarter and almost 20 percent greater than a year ago. Olefin fibers constitute 42 percent of the noncellulosic fibers used in carpets. Carpeting is the most important use of olefin fibers at 59 percent. Woven textile production remained the second largest market for noncellulosic fibers, taking 22 percent of the second quarter domestic shipments. The woven market used 490 million pounds, 2.4 percent more than the first quarter but almost 12 percent below a year earlier. Two fibers made up almost 88 percent of this market: polyester 60 percent; and olefin 27 percent. The knit market took 310 million pounds in the second quarter, 10 percent above the first quarter but 10 percent below a year ago. Domestic shipments of manmade fibers to the knit markets were 13 percent of total domestic shipments. Three fibers dominated the knit market: polyester at 160 million pounds, constituted 52 percent; acrylic, at 50 million totaled 16 percent; and nylon, at 95 million equaled 31 percent. The price of benzene (a precursor to many chemicals) ranged from $0.90 to $0.97 per gallon during the first 7 months of 1996 (figure 14). Production problems and low inventories kept the price slightly above $1.00 during August-November. The price of cyclohexane, a basic chemical used in nylon production, somewhat follows the price of benzene. It averaged $1.05-$1.13 per gallon January-April. During the next 6 months, it was $1.15-$1.17. The price of para-xylene, a precursor to polyester fibers, began the year at $0.41 per pound. Because of chronic oversupply problems, the price declined all year, reaching $0.19 in the fourth quarter (table L). The price of polymer grade propylene, a precursor for acrylonitrile (a raw material for acrylic fibers) and olefin fibers, ranged between $0.18-$0.21 all year. The price of acrylonitrile remained at $0.53 during 1996. The price of ethylene glycol, a raw material used to make polyester fibers, declined from $0.32-$0.35 early in the year to about $0.30 mid-year and to $0.23 in the fourth quarter. The price of caprolactam remained in the $0.93-$0.96 range, although some softness has been reported. Special Article Background and Perspective on U.S. Cotton Imports by Carol Skelly and Janise Zygmont* Abstract: During the 6-month period May-October 1996, an unprecedented volume of raw cotton imports, about 700,000 bales, entered the United States under cotton import quotas, raising questions in the cotton industry about the policies which permit cotton imports and the supply/demand conditions under which further imports are likely. The purpose of this paper is to clarify the policies and price scenarios that activate cotton import quotas and to provide a historical perspective on the probability of imports. Keywords: Cotton, imports, Step 3. Import quotas under the cotton farm program legislation allow a volume of imports, in excess of that authorized by the Uruguay Round of the GATT, to enter the United States at the lower, in-quota tariff rates. Under the Uruguay Round, the old Section 22 absolute quotas were replaced by a two-tiered tariff system. In-quota tariff rates ranging from zero to about 2 cents per pound apply to approximately 225,000 bales of imported cotton (plus about 46,000 bales for Mexico under the North American Free Trade Agreement [NAFTA]), subject to restrictions on country of origin, staple length, and type of cotton; much higher over-quota tariffs apply to imports in excess of the amount subject to the in-quota tariffs. The in-quota amounts permitted will increase each year until 2000, when they will be capped at about 350,000 bales, which, with the NAFTA amount, yields a total of about 400,000 bales. *Agricultural Economists, Farm Service Agency, USDA. In addition, the cotton program legislation includes two import quota authorities which are activated under specified market price conditions. The first of these, referred to in this paper as the "spot market quota," has been in the law since 1978. It triggers when the monthly average U.S. spot market price exceeds 130 percent of the preceding 36-month average spot price. The quota amount is equal to 21 days of domestic mill consumption of upland cotton at the seasonally-adjusted period for which data are available. However, if a spot market quota was established during the preceding 12-month period, the quota amount equals the lesser of 21 days of domestic mill consumption or the amount of upland cotton needed to increase supply to 130 percent of demand. Importers have 90 days from the date the quota is established to enter cotton into the United States. The second type of quota is called the Step 3 quota because it constitutes the last of a three-step process included in the 1990 and 1996 farm acts to ensure the availability of competitively-priced U.S. cotton. The Step 3 import quota authority was intended to provide U.S. mills with access to raw cotton at prices equivalent to those paid by their foreign competitors. Step 3 is activated when the weekly average of the lowest U.S. price quoted for the Liverpool "A"-index1 for delivery to northern Europe, (referred to as the USNE), adjusted downward for the value of any payments made under the Step 2 program,2 exceeds the weekly average "A"-index (referred to as the NE) by more than 1.25 cents per pound for 10 consecutive weeks. Of the two U.S. growths quoted, Memphis Territory and California/Arizona, the Memphis price is usually the lowest. 1The A-index is the daily average of the five lowest priced international cotton growths of a total potential fourteen growths quoted by Cotlook, Ltd., a private concern based in Liverpool, England. 2The Step 2 program consists of direct payments to domestic users and exporters of U.S. cotton. Payments are activated when the USNE exceeds the NE by more than 1.25 cents per pound for 4 consecutive weeks, provided that Step 3 has not triggered. The payment rate is the differential USNE-NE-1.25 in the fourth week of the 4-week period. The Step 3 quota amount is equal to 1 week's domestic mill consumption of upland cotton at the seasonally-adjusted average rate of the most recent 3-month period for which data are available. A Step 3 quota is open for 180 days, but applies to cotton purchased not later than 90 days from the date the quota opens. The statute precludes the opening of a spot market quota if either a spot market or a Step 3 quota is in effect; it also precludes the opening of a Step 3 quota if a spot market quota is in effect, but weekly Step 3 quotas may overlap one another. Table A-1 shows the dates established and the amounts imported under these two kinds of import quotas since 1978. Spot market quotas have been established several times since August 1, 1978, with very little cotton actually imported. The weekly Step 3 quotas, which account for virtually all of the recent cotton imports, first opened in April and May of 1995. Following a hiatus of 5 months, Step 3 quotas resumed in late October 1995 and have triggered continuously since that time. Cotton imported under Step 3 has originated mainly in Uzbekistan, Argentina, and Australia. The import periods identified in table A-1 group the overlapping Step 3 quotas into periods of no longer than 9 months in order to correlate import quantities with market price patterns. It is perhaps worth noting that although the increased imports in marketing years 1995/96 and 1996/97 have been entered under Step 3, the price conditions for the spot market quota were also satisfied in the months of January through July 1995. However, spot market quotas were not invoked because either an earlier spot quota or the Step 3 quotas were already in effect. The Step 3 activation mechanism dictates that quotas will continue to open each week until such time as the differential USNE-NE falls below 1.25 cents per pound. The differential fell from 9.65 cents per pound on October 1, to 5.6 cents per pound on November 1. Figure A-1 indicates the projected cumulative quantities allowed and time periods for the Step 3 quotas announced through October 31, 1996. History thus provides several cases of import quotas triggering without attracting significant cotton imports. What appears to distinguish the most recent period is the substantial price differential between the U.S. and world prices, that differential being key not only to the activation of Step 3, but also to the desirability of importing cotton. Figure A-2 shows the spread between the USNE and the NE, used to measure the gap between U.S. and world prices, for each of the past import quota periods listed in table A-1, with the actual imports during each import period. Both average and peak values of USNE-NE were much higher during the first 6 months of calendar 1996, 10.7 and 14.9 cents per pound, respectively, than during earlier import periods. Figure A-3 plots the flow of imports in the recent period, by week, against the USNE-NE spread, with an assumed average 5-month lag. USDA has no data on the purchase dates for imported cotton; however, the time elapsed between the peak value of USNE-NE, when the maximum incentive for mills to purchase foreign cotton occurred, and the peak import delivery period was approximately 5 months. These data also demonstrate that imports are highly correlated to the USNE-NE spread. From mid-May through early October, weekly imports averaged 33,000 bales, but fell sharply in mid-October and have not rebounded. Assuming the 5-month average lag is a close approximation, the graph suggests that nearly all import purchases were made when USNE-NE ranged between 7.5 cents and 15 cents per pound and may well have occurred at the upper end of the range. Correlation of imports to the USNE-NE spread begs the question of why U.S. prices were so much higher than world prices in the spring of 1996. The fundamentals of U.S. supply and demand relative to world supply/demand explain a large part of the spread's performance. U.S. stocks-to-use (S/U) ratios, where use includes both domestic consumption and exports, were extremely tight for both the 1994/95 and 1995/96 marketing years at 12.9 and 14.2 percent, respectively. Strong export demand in both years and disappointing yields from the 1995 crop were primarily responsible for the continued shortage. However, despite the similarity of these ratios, imports were substantially higher during the summer and fall of 1996 than in the corresponding period of 1995, although there was ample opportunity to import under the quotas in both years. The major difference between these 2 years was the change in the foreign S/U ratio, which increased from 28.8 percent for 1994/95 to 35.2 percent for 1995/96, due mainly to higher production in Pakistan, India, and China. USDA and other commodity analysts often use S/U ratios to derive price functions. It is difficult to construct a valid historical series involving U.S. price behavior because, until very recently, the price support loan program frequently held U.S. prices above market-clearing levels. However, a linear regression equation, 10.84 - (7.06 x USSUc/FORSUc), where USSUc is the ratio of U.S. ending stocks to domestic consumption and FORSUc is the ratio of foreign stocks to foreign consumption, appears to provide a useful indicator of the USNE-NE. This equation was derived by correlating the USNE-NE spread with USSUc/FORSUc beginning in 1978. Five years when U.S. S/U ratios exceeded 40 percent were eliminated from the analysis because of the dominance of loan economics in years of surplus under the pre-1990 farm program; these were all years preceding 1989/90. Dummy variables were introduced for 1978/79 and 1980/81 because extremely low crop yields in those years resulted in abnormally high U.S. prices; a dummy variable was likewise used in 1984 because the U.S. domestic price was roughly equal to the price support loan rate, indicating market interference from the government program. With these adjustments, the equation explains about 80 percent of the variation in the observations and the standard error of the USNE-NE estimate was 1.4 cents per pound. The actual and predicted values of the spread for the 7 most recent years, 1989/90 through 1995/96, are shown in table A-2. The predicted value was within 1.7 cents of the actual value in all 7 years. USDA is prohibited by law from publishing projections of cotton prices or price spreads; however, two tentative conclusions can be drawn from this analysis. The first is that imports in quantities significant to the market are likely with USNE-NE differentials of at least 7.5 cents per pound; spreads of this magnitude are historically rare but may occur with greater frequency in the future if the United States tends to carry lower stocks under more market-oriented farm programs. The second is that higher differentials are most likely when a cotton shortage in the United States occurs in the context of more abundant foreign supplies, as measured by the ratio of U.S. to foreign S/U ratios, and such as occurred at the end of the 1995/96 marketing year. If 7.5 cents per pound is the lower bound for a USNE-NE price differential likely to attract imports, then, using the linear regression equation, one can estimate an upper bound on the U.S.-to-foreign stocks:use ratio under which imports can be expected to occur; that is, an average USNE-NE of 6.1 cents per pound (7.5 cents minus one standard error of 1.4 cents) yields a USSUc/FORSUc of about 0.67. USSUc/FORSUc ratios of .67 or less have occurred in only 2 of the 18 marketing years since 1978: 1994/95 with a ratio of 0.65 and 1995/96 with a ratio of 0.55. LIST OF TABLES Text Tables A. Estimated 1996 and actual 1995 upland cotton acreage, yield, and production B. Estimated 1996 and actual 1995 ELS cotton acreage, yield, and production C. World and U.S. cotton prices, August 1995-Present D. U.S. cotton export shares to selected countries E. Per capita domestic cotton consumption F. World cotton supply and use G. ELS cotton supply and use in foreign producing countries, 1994-97 H. Wool supply and disappearance, clean content, 1992-96 I. U.S. imports of raw wool for consumption, clean content, 1989-96 J. U.S. mill consumption of raw wool, clean basis, quarterly, 1989-96 K. U.S. mohair supply and disappearance, clean content, 1992-96 L. Reported prices of raw materials for manmade fibers, 1996 Appendix Tables 1. U.S. cotton supply and use, 1960/61-1996/97 2. U.S. Upland cotton supply and use, 1960/61-1996/97 3. U.S. ELS cotton supply and use, 1960/61-1996/97 4. Upland cotton: Planted acreage, by State, 1960/61-1996/97 5. Upland cotton: Harvested acreage, by State, 1960/61-1996/97 6. Upland cotton: Lint yield per harvested acre, by State, 1960/61-1996/97 7. Upland cotton: Production, by State, 1960/61-1996/97 8. ELS cotton: Planted and harvested acreage, by State, 1960/61-1996/97 9. ELS cotton: Production and yield, by State, 1960/61-1996/97 10. U.S. Cotton supply and disappearance of all kinds, by months, 1992/93-1995/96 11. Program payments to cotton farmers, 1976/77-1995/96 12. Support levels and season-average prices for upland cotton, 1976/77-1996/97 13. Number of active cotton gins, by State, 1985/86-1994/95 14. Cotton ginning charges, by State, 1985/86-1994/95 15. Methods of harvesting cotton, by State, 1985/86-1994/95 16. Methods of seed cotton assembly, by State, 1985/86-1994/95 17. Cotton: SLM spot market prices in designated U.S. markets, 1960/61-1995/96 18. Fiber prices: Landed Group B mill points, cotton prices, and manmade staple fiber prices at f.o.b. producing plants, actual and estimated raw fiber equivalent, 1960-96. 19. Index of prices of selected growths and qualities of U.S. cotton, c.i.f. Northern Europe, monthly, 1987/88-1996/97 20. Index of prices selected growths and qualities of U.S. cotton, c.i.f. Northern Europe, annual, 1960/61-1995/96 21. World cotton supply and use, 1960/61-1996/97 22. Foreign cotton supply and use, 1960/61-1996/97 23. Cotton exports, major foreign exporters, 1960/61-1996/97 24. Cotton imports, major importers, 1960/61-1996/97 25. Former Soviet Union cotton supply and use, 1960/61-1996/97 26. Brazil cotton supply and use, 1960/61-1996/97 27. Turkey cotton supply and use, 1960/61-1996/97 28. China cotton supply and use, 1960/61-1996/97 29. India cotton supply and use, 1960/61-1996/97 30. Pakistan cotton supply and use, 1960/61-1996/97 31. U.S. fiber consumption: Total and per capita, by type of fiber, 1989-96 32. Cotton and manmade staple fibers: Mill consumption on the cotton spinning syste, 1960-95 33. U.S. wool supply and use, 1975-96 34. U.S. imports of raw wool for consumption, clean yield, 1960-95 35. U.S. raw wool imports by country of origin, clean yield, 1991-95 36. U.S. mill consumption of raw wool, scoured basis, annual, 1960-95 37. U.S. raw wool exports by country of destination, clean yield, 1992-95 38. U.S. trade in wool tops, 1990-95 39. Shorn wool prices: U.S. farm price, Australian offering prices, graded territory shorn wool prices, 1978-95 40. U.S. consumption on the woolen system and worsted combing, annual, 1984-95 41. World wool supply and disappearance, 1987/88-1995/96 42. Sheep population, wool production, and wool exports, major producing foreign countries, 1989/90-1995/96 43. World wool trade by major importing and exporting countries, 1989/90-1995/96 44. Wool sales, and government-owned stocks, major foreign exporters, 1987/88-1994/95 45. International wool prices, 1987/88-1996/97 46. U.S. mohair supply and use, 1973-96 47. U.S. mohair, clean, exports by country of destination, 1990-96 48. Manmade fiber production and capacity, 1993-98 49. Domestic shipments of manmade fibers by major category, 1994-96 50. World textile fiber production, 1980-95 51. Raw-fiber-equivalent of textile manufactures, 1960-96 52. Raw-cotton-equivalent of U.S. imports of cotton-containing textile manufactures, 1989-96 53. Raw-cotton-equivalent of U.S. exports of cotton-containing textile manufactures, 1989-96 54. Raw-linen-equivalent of U.S. imports of linen-containing textile manufactures, 1989-96 55. Raw-linen-equivalent of U.S.exports of linen-containing textile manufactures, 1989-96 56. Raw-wool-equivalent of U.S. imports of wool-containing textile manufactures, 1989-96 57. Raw-wool-equivalent of U.S. exports of wool-containing textile manufactures, 1989-96 58. Raw-silk-equivalent of U.S. imports of silk-containing textile manufactures, 1989-96 59. Raw-silk-equivalent of U.S. exports of silk-containing textile manufactures, 1989-96 60. Raw-manmade-equivalent of U.S. imports of manmade fiber-containing textile manufactures, 1989-96 61. Raw-manmade-equivalent of U.S. exports of manmade fiber-containing textile manufactures, 1989-96