Cotton & Wool YEARBOOK -- TEXT December 21, 2004 November 2004, ERS-CWS-2004 Approved by the World Agricultural Outlook Board ------------------------------------------------------------------------ This TEXT is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The summary was released on November 22, 2004. The complete report will be available electronically in about a month. ------------------------------------------------------------------------ Cotton and Wool Situation and Outlook Yearbook. Market and Trade Economics Division, Economic Research Service. U.S. Department of Agriculture, November 2004, CWS-2004. CONTENTS Summary U.S. Cotton Situation and Outlook World Cotton Situation and Outlook Situation and Outlook for Other Fibers List of Tables Report Coordinator Leslie Meyer (202) 694-5307 Fax (202) 694-5823 E-mail: LMEYER@ers.usda.gov Other Contributors Stephen MacDonald (202) 694-5305 Robert Skinner (202) 694-5313 Wilma Davis (202) 694-5304 (Statistics) Editor Martha Evans Layout and Design Wynnice Pointer-Napper Summary World cotton stocks at the close of 2004/05 (August/July marketing year) are forecast at nearly 44.6 million bales, more than 9 million bales above a year earlier and the highest level since 2001/02. The significant increase from last season is attributable to the tremendous jump in world production in 2004/05, despite another record for global demand. Foreign cotton stocks are also expected to be the highest since 2001/02, with gains in a number of countries, including China. Meanwhile, stocks in the United States are expected to more than double from 2003/04 and are forecast marginally above the 2001/02 season. Global cotton production in 2004/05 is projected at a record 111.7 million bales, 18 percent above last season and 13 percent above the previous high set in 2001/02. Production is forecast higher in most countries this season, with the largest increases expected in China (7.2 million bales higher), the United States (4.3 million), and Pakistan (1.5 million). These three countries are forecast to account for over 75 percent of the gain in 2004/05 world cotton production. Other major producers indicate smaller gains, while Brazil is expected to produce a crop equal to last season. Total foreign cotton production in 2004/05 is forecast at 89.2 million bales, or about 17 percent above last season. World cotton consumption is projected at a record 102.9 million bales in 2004/05, nearly 4.5 percent above last season. Foreign consumption is expected to reach a high of 96.8 million bales, while U.S. mill use continues to decline. Among foreign consumers, the largest increases are anticipated in China (4.0 million bales higher), India (0.7 million), and Pakistan (0.4 million). China is expected to account for 90 percent of the 2004/05 global consumption increase and, at 36 million bales, China’s share of world cotton consumption will reach 35 percent. Global trade in raw cotton is forecast to decline nearly 3 percent from 2003/04 to 32.2 million bales, as production gains in many consuming countries are expected to limit their import needs this season. While U.S. cotton exports are forecast to decline from 2003/04, foreign shipments are projected to rise 2 percent to 19.7 million bales, or 61 percent of world trade in 2004/05. Foreign imports are forecast at 32.4 million bales, nearly 5 percent below the 2003/04 record of 34 million. U.S. cotton production in 2004/05 is forecast at a record 22.5 million bales, a remarkable 23 percent above last season and 2.2 million above the previous high established in 2001/02. This season's outstanding crop is mainly attributable to a record national yield, although area was 2 percent higher than a year ago. U.S. cotton planted area rose to nearly 13.8 million acres this season, but remained the second lowest since 1998/99. Excellent crop conditions throughout the 2004 growing season delivered a record yield despite a lower-than-normal abandonment. Planting occurred on time or ahead of schedule across the Cotton Belt this season while crop development and harvest progressed normally. Abandonment, expected near 4 percent this year, is the lowest in 7 years, while harvested area, estimated at 13.2 million acres, is 1.2 million above last season and the highest in 3 years. The national cotton yield is projected at a record 818 pounds per harvested acre. U.S. cotton exports in 2004/05 are projected to reach 12.5 million bales, down from last season’s record of nearly 13.8 million. Although large U.S. supplies of exportable cotton are available again this season, competition from larger foreign crops likely will limit U.S. shipments in 2004/05. In addition, a reduced import demand will keep global exports below a year earlier. As a result, the U.S. share of global trade is expected at 39 percent, modestly below 2003/04. U.S. cotton mill consumption is forecast at only 6.1 million bales in 2004/05, 400,000 bales below the previous season and the lowest since 1984/85. The dramatic growth of U.S. cotton textile and apparel imports, which have risen over 80 percent since 1997, continues and has forced the U.S. textile manufacturing industry to significantly reduce its capacity. And with the remaining apparel quotas lifted in January 2005, the U.S. industry will face continued pressure from imported products. U.S. cotton stocks at the beginning of 2004/05 were estimated at 3.5 million bales. And with a record crop forecast this season, total U.S. cotton supply in 2004/05 is projected 10 percent higher at 26.1 million bales. Meanwhile, U.S. cotton demand is forecast below production for the first time in three seasons, with total demand projected at 18.6 million bales. As a result, based on these supply and demand estimates, U.S. ending stocks for 2004/05 are forecast to rise dramatically, increasing 4 million bales to 7.5 million, a stocks-to-use ratio of 40 percent. U.S. Cotton Situation and Outlook U.S. Cotton Review, 2003/04 The 2003/04 (August/July) marketing year began with U.S. cotton stocks at 5.4 million bales, 2 million below the previous season. The 2003 cotton crop was the second planted under the Farm Security and Rural Investment (FSRI) Act, which continued the market-oriented planting flexibility provided producers in previous legislation and institutionalized an improved safety net through the counter-cyclical income stabilization program. In addition, under the 2002 farm act, farm owners and operators had a one-time opportunity to update base acreage for both direct and counter-cyclical payment calculations. Farm yields for the new counter-cyclical program could also be updated to reflect recent history. In 2003, relative net returns at planting time favored cotton over competing crops but unfavorable springtime weather forced some producers to plant less than they had intended. In the United States, 2003 cotton area decreased to 13.5 million acres, 3 percent below the 14 million planted in 2002. The national abandonment rate of 11 percent equaled that of 2002, resulting in 2003 total cotton harvested area of 12 million acres, also 3 percent below the previous year. The area reduction in 2003 occurred mainly in the Southeast, as planted area in the other Cotton Belt regions were similar to that in 2002. The lower yielding Southwest continued to contribute the largest acreage abandonment, accounting for 86 percent of the 2003 abandoned area. As a result, the U.S. yield averaged a record 730 pounds per harvested acre, 65 pounds above 2002. In 2003, the higher yield more than offset the decline in harvested area, allowing U.S. cotton production to total nearly 18.3 million bales, an increase of 6 percent (1.1 million bales) from the previous year. In 2003/04, total U.S. cotton demand expanded to 20.2 million bales, more than 1 million bales above 2002/03 and the highest demand for U.S. cotton in 9 years. While U.S. cotton mill use declined for the sixth consecutive season, raw cotton exports increased to a record. In 2003/04, U.S. cotton exports approached 13.8 million bales, 16 percent above the previous season, as foreign cotton imports established a new high. Foreign mill use in 2003/04 was also at a record high of 92 million bales. With world cotton trade increasing to 33 million bales, the 2003/04 U.S. share of global trade expanded from 39 percent in 2002/03 to nearly 42 percent. In contrast, U.S. cotton mill consumption declined again in 2003/04 to 6.5 million bales from 7.3 million the year before. In 2003/04, U.S. mill use was the lowest since 1985/86 when mill use was only 6.4 million bales. Mill use continued to deteriorate as capacity was reduced further due to competition with cotton textile and apparel imports, especially over the last 6 years. During this period, the strength of the U.S. dollar generally has encouraged imports and hampered U.S. cotton textile exports abroad. These factors have forced textile and apparel manufacturers to concentrate on smaller niche markets that have reduced their output dramatically. With U.S. cotton supply declining to 23.7 million bales in 2003/04 and total demand rising, stocks at the end of last season fell nearly 35 percent. Ending stocks were placed at 3.5 million bales, a decrease of nearly 1.9 million bales during the season. As a result, a stocks-to-use ratio of approximately 17 percent in 2003/04 was the lowest in 8 years. With a record world cotton demand in 2002/03 reducing global stocks to their lowest level since 1995/96, U.S. and world prices were at their highest since 1997/98. The average upland price received by producers improved from 44.5 cents per pound in 2002/03 to 61.8 cents. The extra-long staple (ELS) price also increased, rising from 2002/03's 86 cents per pound to average $1.21 in 2003/04. Supply Outlook for 2004/05 As planting time for the 2004 crop approached, U.S. cotton futures prices had risen modestly from those of the previous year. Despite relative prices for competing crops--like corn and soybeans--slightly more attractive than a year earlier, area planted to cotton rose slightly in 2004. However, area did not rise as high as indicated by the March farmers’ planting intentions survey as some area intended for cotton was seeded to alternatives. As a result, nearly 13.8 million acres of cotton were planted this season, 2 percent above 2003 and nearly 1 million acres below the 5-year average (table A). Upland cotton area this season is estimated at 13.5 million acres, compared with 13.3 million in 2003. Upland area gains in the western half of the Cotton Belt more than offset slight declines in the eastern half. ELS cotton area, on the other hand, increased nearly 43 percent to 255,000 acres in 2004, compared with only 178,600 acres a year earlier. The rise in ELS acreage occurred largely in California, where area increased by 70,000 acres this season. Although total cotton planted area this season rose slightly, harvested area was substantially higher due to the excellent growing season across the Cotton Belt. The abandonment rate based on the November estimate of 4 percent--540,000 acres--was the lowest since 1997/98. As a result, U.S. cotton harvested area, estimated at 13.2 million acres, is the highest in the past 3 years. U.S. crop conditions during the 2004 growing season were impressive across the Cotton Belt, remaining well above any recent season. In fact, 2004 conditions were well above a year ago in almost every State. As a result, U.S. cotton crop conditions rivaled the exceptional season of 1987--a season of low abandonment and a then- record yield (fig. 1). Based on November 1st conditions, the 2004 U.S. cotton crop was estimated at 22.5 million bales, 4.3 million or 23 percent above last season’s crop. Compared with 2003, this season’s record crop is based on a higher harvested area and a record yield. The U.S. average cotton yield is currently projected at 818 pounds per harvested acre, 12 percent higher than last season’s record of 730 pounds (fig. 2). Upland production is projected at 21.8 million bales in 2004, with an average yield forecast at 808 pounds per harvested acre. On a regional basis, forecast production is larger in three of the four regions of the Cotton Belt this season. In the Southwest, a record yield estimate of 674 pounds per harvested acre--despite a low abandonment--pushed output to more than 8.1 million bales, the region’s largest crop ever. In the Delta, a record yield estimate of 935 pounds per harvested acre provided an upland crop of nearly 6.7 million bales, the largest crop in 3 years and the fourth largest on record. In contrast, the Southeast region’s production estimate is similar to that of 2003, as the lowest area in 10 years was about offset by a higher yield. Current estimates place output at 4.5 million bales. In the West, the upland crop is estimated at 2.5 million bales this season, the highest since 2001. Excellent growing conditions this season--particularly in California--provided the region with a yield rebound. Upland yields in the West are projected at 1,420 pounds, approximately 20 pounds above the previous high established during the 2002 season. ELS production is forecast at 720,000 bales in 2004, nearly 300,000 bales above the 2003 crop and a record. The largest area in 3 years and a record yield pushed the crop to the current estimate. The national ELS yield is projected at 1,366 pounds per harvested acre, 24 pounds above the 2002 record. California continues to dominate ELS production, accounting for about 90 percent of the area and output. U.S. cotton stocks on August 1, 2004, were estimated at 3.5 million bales, 1.9 million below the stock estimate at the beginning of 2003/04. And like the past four seasons, only a small volume of raw cotton imports are expected to enter the United States this season, as ample supplies from this season’s large production and recent declines in mill use limit the need for foreign supplies. As a result, total U.S. cotton supply in 2004/05 is projected at 26.1 million bales, 2.4 million above last season and one of the largest supplies since the mid-1960s. Demand Outlook for 2004/05 The U.S. cotton demand outlook for 2004/05 is projected to decline from last season’s 9-year high. This season’s total use is forecast at only 18.6 million bales, down from 20.2 million in 2003/04 and the smallest demand for U.S. cotton since 2000/01. U.S. exports are expected to contribute the larger share--67 percent--of total U.S. cotton demand for the fourth consecutive season. U.S. cotton exports are forecast at 12.5 million bales, 9 percent below the record of nearly 13.8 million set last season. Although large U.S. supplies of exportable cotton are available again this season, competition from a larger foreign crop likely will limit U.S. shipments in 2004/05. In addition, a reduced foreign import will keep global exports below a year earlier. As a result, U.S. cotton exports are expected lower this season despite another record foreign consumption projection (table B). Upland cotton shipments in 2004/05 are projected to surpass 11.9 million bales, 10 percent below the previous season, while ELS exports are expected to rise to 575,000 bales, 7 percent above last season and the second highest on record. With prospects for world trade decreasing nearly 3 percent in 2004/05, the U.S. share of global trade is expected to reach 39 percent, 3 percentage points below last season but similar to 2002/03 (fig. 3). Based on U.S. Export Sales data through mid-November, U.S. cotton export commitments (shipments plus outstanding sales) for 2004/05 totaled 7.3 million 480-pound bales, compared with 8.1 million reported a year earlier. Upland cotton shipments to date have reached 1.9 million bales, compared with 2.3 million in 2003/04. Similarly, this season’s upland outstanding sales are lagging a year ago, with 4.9 million bales reported as of mid-November compared with 5.5 million during the comparable period last season. However, expected sales this season to China have not materialized as early as last year when commitments to China were already near 3 million bales. In contrast, combined ELS shipments and outstanding sales were ahead of the year-earlier level; as of mid-November, ELS commitments were 19 percent higher at approximately 380,000 bales, or about 66 percent of the current ELS export forecast. U.S. cotton mill consumption is forecast to reach only 6.1 million bales in 2004/05, nearly 400,000 bales below last season and the seventh consecutive year of decline. The current projection is more than 5 million bales below the recent high seen in 1997/98 as U.S. cotton textile and apparel imports have risen over 80 percent during this period. The competition from these imported products has continued to force adjustments in the U.S. industry. And with the remaining apparel quotas lifted in January 2005, the U.S. textile industry is expected to face additional pressure from imported products. As a result of trade liberalization over the last decade, the U.S. textile and apparel industry is dramatically smaller, but perhaps more efficient and able to compete in the global marketplace. Many U.S. textile and apparel processors have continued to focus on core products and niche markets to stay competitive. Consequently, U.S. cotton mill demand has fallen dramatically over the last decade, plummeting from 71 percent in 1998/99 to an estimated 33 percent in 2004/05 (fig. 4). This season, upland mill use is forecast at 6.0 million bales, the lowest in 20 years, while ELS consumption is projected at 65,000 bales, the lowest in 12 years. Based on the first 3 months of data from the Department of Commerce, the seasonally adjusted annual rate of cotton consumption averaged approximately 6.4 million bales, above the current forecast. U.S. cotton mill use has been relatively stable in calendar year 2004, perhaps due to binding quotas still in effect on numerous cotton products. In the past, quota could be ‘borrowed’ from the subsequent year, but since there are no quotas for 2005, this has effectively reduced the growth in imported products and has perhaps sustained mill use at levels closer to 2003/04. Actual cotton mill use for August through October 2004 totaled 1.64 million bales, compared with 1.68 million a year earlier. Like cotton, manmade fiber mill use has only decreased slightly during the first 3 months of 2004/05. Consequently, cotton’s share of fiber consumption on the cotton system remains near the year-earlier level and the 2003/04 average of 81.8 percent. Based on these U.S. cotton supply and demand projections, ending stocks for the 2004/05 marketing year are estimated to climb 4 million bales to 7.5 million, similar to the 2001 season (fig. 5). The dramatic increase is largely attributable to the record U.S. crop this season, although demand is also projected lower than last season. The increase in ending stocks for 2004/05 results in a U.S. stocks-to-use ratio rising from 17 percent to 40 percent, also similar to 2001/02. Upland stocks are estimated at 7.3 million bales, while ELS stocks are projected at 193,000 bales. U.S. Textile Trade and Domestic Consumption The overall volume of U.S. textile trade in calendar 2004 is expected to expand (based on preliminary data) from last year. The trend of increasing U.S. textile trade is the result of the continued liberalization of world textile and apparel trade. The U.S. textile trade deficit will increase once again, as the volume of imports expands faster than those for exports, despite having similar percentage increases so far this year. In calendar 2003, the textile trade deficit for all fibers reached a record of 11.9 billion (raw- fiber-equivalent) pounds, 14 percent above 2002. U.S. textile and apparel imports during the first 9 months of 2004 totaled 13.2 billion pounds, about 5 percent above the comparable period in 2003. Similarly, textile exports through September 2004 have risen 4 percent to nearly 3.8 billion pounds. As a result, the textile trade deficit for all fibers during the first 9 months of 2004 reached 9.4 billion pounds, 5 percent above the same period in 2003. U.S. cotton textile imports and exports have followed a similar pattern so far in 2004. Cotton textile imports totaled 7.2 billion pounds through September 2004, 2 percent above a year earlier. Meanwhile, cotton textile exports had risen 1 percent for the corresponding period to 1.8 billion pounds. For calendar 2004, U.S. cotton textile and apparel imports are expected to rise for the 16th consecutive year, with exports continuing to improve for the third consecutive year. Imports for the year will likely exceed the equivalent of 19.6 million bales (9.4 billion pounds) of raw cotton, only about 2 percent higher than in 2003. Similarly, U.S. cotton textile and apparel exports are likely to approach the 5-million-bale level (2.4 billion pounds), about 3 percent above 2003 and nearly matching the 2000 level. However, with the import volume increasing more than exports, the U.S. cotton textile trade deficit is expected to climb higher in 2004 to the equivalent of nearly 14.7 million bales of raw cotton (fig. 6). Imported textile and apparel products continue to limit U.S. mill use of all fibers. In 2004, total U.S. fiber mill use is expected to remain near last year’s 13.4 billion pounds. Based on data for the first 9 months of 2004, U.S. mill use of each fiber type, with the exception of manmade fibers, is expected to decrease from 2003. Cotton mill use is expected to decrease for the seventh consecutive year to about 3.2 billion pounds, the lowest since 1986. As a result, cotton’s share of U.S. fiber mill use continues to erode and will likely decline from 24.4 percent in 2003 to about 23.5 percent in 2004, while manmade fibers account for close to 75.5 percent of U.S. fiber mill use (appendix table 25). In contrast, 2004 total domestic consumption (mill use plus net textile trade) of cotton is expected to remain near last year as imported products continue to provide a large share of domestic consumption. Based on data for the first 9 months of 2004, domestic consumption totaled 7.8 billion pounds, similar to the comparable period in 2003. By year’s end, cotton domestic consumption is likely to approach a record 10.3 billion pounds, 1 percent above 2003 (fig. 7). Based on these estimates, U.S. per capita cotton consumption would again be approximately 35 pounds, similar to the last 2 years. However, less than one-third of this total is expected to be spun in U.S. mills in 2004, compared with two-thirds just a decade ago. World Cotton Situation and Outlook World Production and Consumption Surge in 2004/05 The volatility of world cotton production in recent years has been perhaps its greatest since the mid- 1980s, and prices have been the highest since the early 1970s (fig. 8). Prices rose substantially in 2003/04 as consumption fell slightly, and production rose less than expected. But, in 2004/05, while consumption appears poised to rise strongly, production is forecast to rise by a much larger amount, driving prices downward. Over 2002/03-2004/05, prices have been their most volatile since the 1970s, as a period of relatively strong world demand has coincided with shifting yields in China and surging production in India. World production during 2003/04-2004/05 has been its most volatile since the mid-1980s, driving prices first higher and then lower despite offsetting movements in world consumption. In 2004/05, world cotton production is forecast to rise 11.7 million bales from the year before, to 111.7 million. World consumption is forecast to rise 4.4 million bales, to 109.2 million. World cotton prices in November 2004 averaged 38 percent lower than in November 2003--a year earlier a similar comparison showed a 45-percent increase (table C). Production Growing Around the World in 2004/05 The largest increase in production in 2004/05 is expected in China, up 7.2 million bales to 29.5 million. China’s cotton prices soared in the fall of 2003, paving the way for a second consecutive increase in area planted in 2004. In those 2 years, China’s cotton area rose 36 percent. China’s 1999 cotton market reforms had helped drive cotton area below 4 million hectares (down to about 9 million acres). Over the next few years, the world had grown accustomed to the notion that China would probably never again plant more than 5 million hectares (12.4 million acres) of cotton. Then, back-to-back price increases about doubled China’s cotton prices over 2 years by January 2004. Plantings for the 2004/05 crop rose to about 5.7 million hectares, their highest since 1992, and the world was facing the prospect of a record Chinese crop as yields recovered from their precipitous decline the year before. A relatively small increase in production is foreseen for India from the year before in 2004/05, up 400,000 bales to 14.2 million. However, this would be a 34-percent increase over a 2-year period. India’s monsoon was reportedly extremely favorable in 2003/04, and relatively favorable in 2004/05. Thus, yields are forecast slightly lower than the year before in 2004/05, but still 17 percent above 2 years earlier. Producers in India are planting ever-larger amounts of Bt cotton, but the relatively limited availability of Bt cottonseed suggests this does not account for the entire increase in yields. The use of hybrid cotton has spread to northern India, and the pest problems that affected the region for years have recently abated. Even without much change in India, world output is expected to soar in 2004/05 due to increased production around much of the world. U.S. production in 2004/05 is forecast to rise 4.3 million bales from last season as yields there rise 12 percent to a record-high. Pakistan’s production is forecast to rise 1.5 million bales as yields rise 15 percent and area rises to a record-high. Larger crops are also foreseen in Central Asia (up 1.1 million bales), Africa (up 1.2 million bales), Australia (up 600,000 bales), and Latin America (up 335,000 bales). Globally, rebounding yields and growing area in 2004/05 are similar to developments in 2001/02, the last time world cotton prices fell. However, cotton prices in 2004/05 remain higher than they did in 2001/02. The A-Index in November 2004 may be 38 percent lower than during the year before, but remains 30 percent above its November 2001 level. Inflation has driven U.S. prices about 5 percent higher in general since then, and there are any number of particular differences between expectations for developments during these two different marketing years. These include expectations for exchange rates and government policy in China. However, perhaps the most important difference is in the expectations for consumer demand. Global Cotton Consumption Fueled by Income Growth Since the 20th century has drawn to a close, global cotton consumption has accelerated, boosted by an intersection of favorable trends in incomes, fiber prices, and clothing trade. Global cotton consumption fell slightly in 2003/04, its first decline since the Asian financial crisis in 1998/99, but has otherwise been growing well above average. After growing 0.3 percent during the 1990s, cotton consumption has grown at an estimated 2.6 percent annually during the first 5 years of the 21st century. Since 1960, world consumption has grown only 1.8 percent annually. Income growth primarily affects cotton consumption through clothing consumption. Clothing is the primary consumer good produced with cotton, and clothing consumption can be very responsive to income. For example, during the Asian Financial Crisis, Korean urban income dropped 13 percent in the second quarter of 1998, while clothing consumption fell 30 percent, the largest decline of any expenditure category. Clothing is a necessity, but it is also a semi-durable product the purchase of which can be delayed, making demand potentially extremely responsive to short-term changes in income. In the long run, economists have determined that clothing consumption is far less responsive, actually growing more slowly than income on average. Textile consumption is positively correlated with income both over time and across countries. In some respects, clothing is a necessity, and therefore its consumption would not rise as strongly as income. However, clothing can be a luxury, with haute couture garments selling for $100,000. Clothing purchases embody more than acquiring a stockpile of fiber, since a consumer simultaneously purchases clothing design, the construction of the garment from textiles produced with fiber, and retail services along with the fiber. With a large margin between fiber and clothing costs, changes in clothing purchases may not be completely correlated with changes in household consumption of fiber. Consumers may choose clothing with more value- added, such as paying for more expensive designer labels, when increasing their expenditures on clothing, or adjust their preferences towards articles derived from lighter fabrics. Studies estimating the impact of income changes on clothing consumption have provided different answers at different times. Houthakker and Taylor’s landmark study in 1970 indicated that clothing is a necessity, consumption of which grows less than income. In the case of U.S. consumers, clothing consumption grew about half as fast. More recent studies have suggested that clothing expenditures might grow almost as quickly as income, with an ERS study estimating an income elasticity of clothing consumption of at least 90 percent. Comparing kilograms of fiber embodied in textile products in various countries with income in those countries adjusted to purchasing power parity supports this conclusion (fig. 9). Global Income Trends Favorable The International Monetary Fund is forecasting a 4.3 percent increase in global economic output in 2005, the third consecutive year of above-average growth. Since 1998, world GDP growth has been below its long-run average level only twice, in 2001 and 2002. China is expected to remain the fastest growing major market in 2005, growing 8 percent, but India is expected to also grow strongly, expanding 7 percent. Japan’s growth is expected to slow, but will continue to remain well above the stagnant rates it endured through 2002. Since 1999, led by China, developing Asia has consistently grown substantially faster than the rest of the world, and substantially above its own pre-1999 performance. The opposite has held true for the European Union and Japan. Therefore, not only are world incomes growing at an above-average rate, but growth is concentrated in lower income countries. Clothing purchases respond more strongly to income changes in poorer countries, as the flattening curve in figure 9 indicates. An ERS study found in 2003 that while Zambia and Mali had the highest elasticity of textile consumption with respect to income, the lowest was in Luxembourg and the United States. While Asian textile consumers are not the world’s most responsive to income changes, household fiber consumption in Asia is only 5.6 kilograms per capita, compared with 33 kilograms in the United States. Clearly, consumers in Asia are much farther from satiation of their potential fiber demand than are consumers in the United States, and direct a greater proportion of their growing incomes toward increasing the volume of their clothing purchases. This has helped sustain above-average global cotton consumption over the last 5 years. Lower Prices Encourage Consumption of Clothing and Cotton Even as rising incomes have driven demand for clothing higher, other forces have led prices for clothing to fall. Clothing prices have declined in a variety of countries over the last 10 years, and they’ve fallen more rapidly over the last 5 years. Local currency, inflation-adjusted clothing prices in a basket of nine countries fell 7 percent during 1999-2003. Prices fell most strongly in developed countries, reflecting the growing role of imports. Growing trade liberalization and reduced costs of transportation helped open U.S. and EU markets to lower-priced imported products. Clothing price declines were much less pronounced in lower income countries, with prices in South Korea and China falling only 1 percent, for example. Global changes in trade policy have accounted for some of the decline in clothing prices. A growing web of bilateral trade agreements permitted the United States and the EU to tap the opportunities for lower processing costs in nearby countries. In the years after the implementation of the North American Free Trade Agreement, Mexico rose to become the largest single foreign source of U.S. clothing. Similarly, the EU’s use of free-trade agreements throughout much of the Mediterranean and Eastern Europe means about 45 percent of EU imports are sourced from the region. Trade liberalization has also been multilateral, under the aegis of the World Trade Organization (WTO). Since 1995, the WTO’s Agreement on Textiles and Clothing (ATC) has mandated lower tariffs, the progressive removal of import quotas, and expansion of the quotas remaining in place. Under the ATC’s provisions, the EU’s quotas expanded 64 percent between 1994 and 2004, while U.S. quotas expanded 90 percent. China’s accession to the WTO was also an important step, ensuring that the world’s largest exporter participated in the liberalization of global textile trade. The growing role of trade in world textile markets has also been driven by reduced international transactions and transportation costs. While international shipping rates have been rising in 2004, the trend to date has been significantly downward. At the end of the 1990s, unit costs of sea freight had declined almost 70 percent in real terms over the preceding 10 to 15 years. During this same period, air freight costs fell 3 to 4 percent annually as well. Declining telecommunications costs permitted retailers to extend electronic data interchange (EDI) of sales and inventory data to manufacturers overseas as well as domestically. Cotton Favored by Trade and Price Trends Liberalization and reduced transactions costs have, in part, particularly expanded the role of trade in the consumption of cotton products in developed countries. On a global basis, 31 percent of the clothing and other final products consumed in the world were imported in 2000, up from 23 percent in 1992. In developed countries, the total was higher (47 percent) and reached two-thirds for cotton products in developed countries. While cotton accounts for about 40 percent of world fiber consumption, it accounted for more than 50 percent of world clothing trade, and nearly 60 percent of developed country imports of clothing and other products in 2000. As of 2004, cotton’s share of world clothing trade has probably increased, approaching 90 percent in the United States and Japan by some measures (fig. 10). As rising incomes and falling clothing prices have driven demand for clothing higher, low fiber prices have ensured that fiber demand has followed suit. Cotton prices have fallen even more than prices for competing fibers. While polyester prices during 1999-2003 were down 28 percent in real terms from the previous 5 years, cotton prices fell 35 percent. Since the commercial introduction of polyester in 1949, cotton’s role in world fiber consumption has been retreating. As early as 1965, cotton had come to account for less than 50 percent of the household fiber use in developed countries. Since 1997, developing country consumers have also relied on cotton products for less than 50 percent of their household consumption, but the adoption of synthetic fibers has slowed in recent years. Some of this stabilization may result from shifting global price trends. The end of the Multi-Fibre Arrangement (MFA) after December 2004 would be expected to support some of the trends that have driven world cotton consumption gains to date. With virtually all the remaining quotas removed, trade’s role in consumption should continue growing in the developed countries. Increased opportunities for exporting clothing should support income gains in a number of Asian countries. World cotton consumption is expected to increase 4.5 percent from the year before in 2004/05. This would be the largest percentage increase since 1999/2000. MFA quotas have been only one factor in the evolution of this complex and dynamic sector of the economy, so the completion of the ATC phase-out will be one of many factors determining the outlook in the years ahead. Foreign ELS Production and Consumption Higher According to the International Cotton Advisory Committee (ICAC), ELS output in foreign-producing countries is expected to rise in 2004/05 as most producing countries are projected to increase their output this season. Egypt’s crop is expected to rebound from the low level of 2003/04, offsetting declines in China and Central Asia. Foreign production is expected to jump 20 percent to 2.8 million bales. Egypt is expected to produce nearly 1.4 million bales in 2003/04, similar to the 2002/03 level. Higher 2004/05 consumption and exports among foreign ELS producers are more than offsetting the gains in production as ending stocks are projected to decline slightly (table D). Egypt accounts for most of the expected gain in ELS consumption in foreign-producing countries. ELS consumption in Egypt in 2004/05 is expected to rise 55,000 bales, while total consumption in foreign- producing countries is expected to increase 106,000 bales to 1.7 million. In addition, India and China are both expected to consume slightly more ELS cotton in 2004/05. In China’s case, consumption of ELS is expected to reach a record high of 367,000 bales, while India’s increase to 615,000 bales is expected to rival Egypt as the largest consumer of ELS cotton among the producing countries. Foreign exports of ELS cotton are expected to expand about 8 percent in 2004/05, compared with the year before, to 1.5 million bales. Egypt remains the world’s largest exporter of ELS cotton, as their shipments are expected to increase 25 percent this season as a result of their higher output. Substantially larger ELS cotton exports are also foreseen from China, somewhat offsetting a decline from Sudan and Central Asia. ELS ending stocks in foreign-producing countries are expected to remain relatively low in 2004/05 despite the boost in production. Although stocks in Egypt and India are projected to grow by season’s end, stocks in the rest of the foreign-producing countries are expected to decrease. Total ending stocks in foreign-producing countries in 2004/05 are estimated at only 788,000 bales, a decline of over 40 percent in the past 3 years. Situation and Outlook for Other Fibers U.S. Wool Production Continues Decline U.S. sheep numbers and wool production declined in 2003 for the 14th consecutive year. The U.S. farm price for shorn wool averaged $0.72 per pound, greasy, in 2003, 36 percent above a year earlier. Sheep numbers on January 1, 2004, were 4.5 million head, 4 percent below January 1, 2003, and 53 percent below 1990. Wool production is estimated at 20.1 million pounds (38.1 million, greasy) for the 2003 marketing year (table E). During 2003, U.S. raw wool imports totaled 20.8 million pounds, clean, 16 percent below a year earlier (table F). During 2003, imports of fine wool represented 22 percent of total shipments. Imports of unimproved or other grades not-finer-than 46’s totaled 15.8 million pounds. Shipments from New Zealand represented 75 percent of these coarser grades, while Australia accounted for 72 percent of the finer wool’s last year. With beginning stocks of 53.5 million pounds, total 2003 raw wool supplies were 104 million pounds, clean, similar to a year earlier. Total raw wool mill consumption was not reported by the Bureau of Census for 2003 to avoid disclosure of individual firm data. As a result, an estimate for wool consumed on the worsted combing system was estimated by USDA. According to the Bureau of Census, carpet mill use was 6.0 million pounds, 13 percent below 2002 and raw wool consumed on the woolen spinning systems totaled 12.0 million pounds, down more than 30 percent from a year earlier. However, based on other relevant data in the wool consumption report and their historical relationships, use on the worsted combing system was estimated to have risen to 31.9 million pounds. As a result, wool mill use totaled an estimated 49.9 million pounds in 2003, nearly 7 million pounds (16 percent) above 2002 (table G). Raw wool exports during 2003 were 11.1 million pounds, clean, compared with 8.5 million a year earlier. Shorn wool shipments were 9.6 million pounds and not-shorn (pulled) exports were 1.3 million. Carbonized exports totaled 0.2 million pounds, up 56 percent from 2002. The majority of shorn wool exports went to Germany, China, and India. U.S. prices for clean, mill-delivered territory raw wool have increased sharply for the third consecutive year. Finer grades, 64’s and 62’s, averaged $2.41 and $2.27 per period, respectively, while the 60’s and 58’s averaged $1.73 and $1.79 per pound, respectively. Prices of fine grades were about 50 cents above a year earlier, while the prices of coarse grades were up 30 cents. Domestic prices of Australian raw wool of all grades were sharply higher in 2003 compared with a year earlier. Prices for Australia’s finest wool, the 80’s, averaged $3.23 per pound in 2003, 13 percent above 2002, and the 64/70’s rose to $4.16 per pound, 17 percent above the previous year. The coarse grades also increased from a year earlier. The 60/62’s averaged $3.02 per pound and the 58/56’s averaged $2.81 per pound during 2003. Lower sheep numbers in 2004 imply that wool production could decline further. While the number of sheep declined 5 percent last year, the number of sheep shorn declined 8 percent. With higher, stable prices in 2004 and the continuation of the wool price support program, further reductions in production may be limited (fig. 11). During 2004, wool prices increased through March and April and then weakened slightly over the remainder of the year. The finer grades, 64’s and 62’s, rose to $2.40 and $2.30 per pound, respectively, in March and then declined to $2.36 and $2.11 per pound, respectively, by October. The coarser grades experienced a similar trend, with the 58’s and 56’s averaging $1.63 and $1.49 per pound, respectively, in October. Prices of both fine and coarse grades were near the same level as a year ago. Domestic prices of Australian raw wool except the finest wool, the 80’s, have declined between $0.30 and 0.45 per pound compared with October 2003. The trends that have characterized the U.S. wool industry, declining sheep population and lower production and consumption, have been occurring worldwide. However, the latest estimates from the International Wool Textile Organization suggest that world production may increase slightly in 2004 after reaching a record low of 4.7 billion pounds, greasy, in 2003 (table H). While no estimates have been made for consumption and trade for the 2003 and 2004 marketing years, increasing stock levels may suggest that wool consumption remained near the previous year. Noncellulosic Fiber Industry Improves in 2004 The U.S. noncellulosic fiber industry increased in the first 9 months of 2004 (the latest data available) when compared with the same 2003 period. Total shipments during the first three quarters of 2004, at 6.66 billion pounds, were 4.1 percent more than the similar 2003 period. In contrast, total shipments during calendar 2003 at 8.48 billion pounds, were 2 percent below the previous year. Meanwhile, noncellulosic stocks at fiber producers’ plants were 0.48 billion pounds at the end of September 2004, 12 percent below a year earlier. Stocks at the end of 2003 were 0.56 billion pounds, 3.8 percent below the 2002 level. Total noncellulosic fiber production during January-September 2004, at 6.58 billion pounds, was 3.3 percent above a year earlier (appendix table 42). The annual 2003 production, at 8.46 billion pounds, was 2.8 percent below 2002. Meanwhile, all noncellulosic fiber plants operated at 78 percent of capacity during 2003. However, utilization rates during the first, second, and third quarters of 2004 were 82, 84, and 83 percent, respectively. In addition, the noncellulosic fiber production capacity in 2005 is estimated at 10.6 billion pounds, 0.3 percent above 2004. The carpet facing and backing market continues to consume more fibers than any other fiber market (appendix table 43). During the first half of 2004, the carpet market used 2.0 billion pounds, 47 percent of total noncellulosic domestic shipments, and 3.9 percent above last year. During 2003, the carpet facing and backing market consumed 3.9 million pounds, 2.1 percent above 2002. Nylon fibers dominated this market, taking 51 percent. Nylon staple carpet facing fibers accounted for 74 percent of total nylon staple uses and 17-20 percent of all staple uses. Nylon filament carpet fibers averaged 82 percent of total nylon filament fibers and 27-28 percent of all filament uses. The consumption of olefin in carpet facing and backing during the first half of 2004 was 2.77 million pounds, 0.4 percent above a year ago. Olefin fibers accounted for 40 percent of the carpeting facing and backing markets. Carpeting was the most important use of olefins at 52-54 percent. Woven textile domestic shipments remained the second largest outlet for noncellulosic fibers, taking 17-19 percent or 0.77 million pounds in the first half of 2004, and almost 2 percent above the last year. The woven textile market consumed 1.48 million pounds of all noncellulosic fibers during 2003, 4.9 percent less than the previous year. Two fibers make up 91 percent of this market: polyester accounted for 64 percent while olefin contributed 27 percent. The knit market used 0.33 million pounds during January-June 2004, consuming more than 7 percent of all noncellulosic fiber domestic shipments, and was 25 percent below a year earlier. In 2003 this market consumed 0.65 million pounds, 13 percent below 2002. Three fibers dominate this market; polyester at 68 percent; acrylic at 18 percent; and nylon at 14 percent. Domestic shipments of noncellulosic fibers during January-September 2004 were 6.21 billion pounds, 2.9 percent above a year earlier. Domestic shipments for calendar 2003 were 7.97 billion pounds, 2.1 percent below 2002. Filament fiber domestic shipments during the first 9 months of 2004 totaled 3.87 billion pounds, 3.3 percent more than a year earlier. Filament fiber domestic shipments in 2003 at 5.0 billion pounds were 3.7 percent below 2002. Filament fiber domestic shipments have been dominated by olefin fibers, constituting about 46 percent of the total; nylon accounted for 33 percent while polyester contributed 21 percent. Noncellulosic staple domestic shipments during the first 9 months of 2004 totaled 2.34 billion pounds, 2.3 percent above a year earlier. Staple fiber domestic shipments in 2003 at 3.0 billion pounds were 5.3 percent below 2002. Staple fiber domestic shipments averaged 53 percent in the first 9 months of 2003 and 2004, down from an average of 55 percent during 2000-2002. Nylon staple shipments during 2000- 2003 averaged 18 percent, but averaged 21 percent during January- September 2004. Olefin staple averaged 20 percent during 2000-2003; during the first 9 months of 2004, the average was 19 percent. Acrylic staple shipments averaged 7 percent during 2000-2003 and the first 9 months of 2004.