Economic Integration

As a follow-on to the December 2011 announcement from the US Trade Representative’s Office that the West African Cotton Improvement Program (WACIP) would be funded for an additional four years, the National Cotton Council of America (NCC) last week hosted a meeting of US cotton industry officials and government officials from Chad, Benin and Burkina Faso.

The Council described the Washington DC meeting with West and Central African countries as an effort to build a foundation for better communication and establish the necessary groundwork for cooperation on issues of mutual interest.

NCC Chairman Chuck Coley mentioned recent changes in US farm law and asked the delegation to focus on areas of common interest, instead of a cotton policy that many in Africa believe puts the continent’s farmers at a disadvantage.

"I think we agree that promoting the increased consumption of cotton by the world's consumers is our top priority," said Mr. Coley. He said that US cotton farmers have contributed substantial financial support to promotion programs designed "to ensure that cotton is competitive in all end use markets and is the first choice of consumers." 

He noted cotton’s research and promotion program, which has been supported by US cotton producers with a per bale assessment since 1960.  Moreover, producer check-off dollars have been used to conduct highly successful generic cotton promotion programs throughout the world, he said.

The NCC chairman said the industry is proud of the outreach program initiated by the US industry that served as the predecessor and basis for the West African Cotton Improvement Program.  After initially funding the program at $27 million for seven years that ended in April 2012, the US Trade Representative's Office has added another $16 million to take the program into 2016.

"Now we want to work with you and your farmers to identify ways to improve the program to ensure it yields the maximum possible benefits for your farmers and industries,” said Mr. Coley. “We need feedback to know which activities have generated the best results and what programs should be initiated in the future."

Coley said the NCC supports the extension of duty-free, quota-free access to US markets for raw upland cotton produced in the countries designated as least developed by the United Nations.

"We support the commitment made by US officials last year at the WTO ministerial," he said.  

Coley told the group that the NCC has conveyed its support for prompt enactment of legislation to extend the eligibility of products containing third-party fabrics before it expires later this year, recognizing its importance to employment in Africa. He also said the NCC shares concerns that extending duty-free, quota-free access to textile products from Vietnam and Bangladesh could seriously erode the benefits of African Growth and Opportunity Act (AGOA) for the African countries.

The National Cotton Council is addressing three core issues -- market access, export subsidies and domestic support – about which the West Africans are concerned, Mr. Coley told the delegation.

"We eliminated an export subsidy and our export credit programs are being substantially modified," he noted. "We have supported enhanced market access by supporting duty-free, quota-free access for your fiber and by the extension of the important textile market access provisions in AGOA. We also have addressed your concern about our domestic supports by proposing significant reforms to the US cotton program for inclusion in the new farm law."

In closing, Mr. Coley stressed the issues that US and West African growers have in common.

"We look forward to engaging in a dialogue with your industry representatives and we will look forward to your responses about how WACIP can be improved," he said. "Your producers will benefit when yields are enhanced, when they receive a larger share of the world price and when there is true competition for their business. We believe enhanced communications, as well as programs like WACIP and others, can advance those objectives."

Questions:  Which issues (US and African) are most critical and should be addressed most immediately?

Are most recent changes in US cotton policy pertaining to producer supports, export subsidies and credit programs enough to allay the concerns of African growers?

What sort of investment (time, money, education, etc) should be expected from African countries participating in the West African Cotton Improvement Program to ensure its success?

The IntercontinentalExchange (ICE) has announced its intention to stop issuing its weekly report of the speculative and hedge positions of traders in the No. 2 cotton futures contract and for fresh concentrated orange juice after July 2.

Originated by the New York Cotton Exchange (NYCE), ICE carried on with the report for cotton and orange juice futures when it purchased the Board of Trade of New York, a successor to the NYCE.  No other commodity exchanges make a weekly spec/hedge report.

An exchange official reports that there are two reasons for the discontinuation:

• The data in the report is similar to the Commodity Futures Trading Commission's (CFTC) weekly Commitment of Traders reports, which are published in three different formats on a weekly basis, and which contain additional information beyond what's in the spec/hedge report.
• The amount of work required by each clearing member firm to make timely and accurate reports to the ICE each week solely for the rather limited information provided for only two futures contracts.

The sense on the part of the exchange was that the value added by the spec/hedge report, considering the CFTC already publishes the Commitments of Traders report,  was outweighed by the costs to the clearing members in time and effort, the ICE official explained.

According to the CFTC, the Commitments of Traders report provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the minimum reporting levels established by the CFTC.

Reports are available in both a short and long format. The short report shows open interest separately by reportable and non-reportable (small speculative) positions. For reportable positions, additional data is provided for commercial and non-commercial (speculative) holdings, spreading, changes from the previous report, percents of open interest by category, and numbers of traders.

The long report, in addition to the information in the short report, groups the data by crop year, where appropriate, and shows the concentration of positions held by the largest four and eight traders.

Questions:  Is the ICE decision justified?

What reason or reasons can be given to continue the spec/hedge report?

A slowing general economy, coupled with downturns in manufacturing and retail sales, has prompted China’s central government to lower interest rates and introduce a somewhat greater degree of flexibility for the nation’s bankers.

In it’s latest edition of Cotton Outlook, Liverpool-based Cotlook, Ltd. reports the benchmark, one-year lending rate has been reduced to 6.31 percent from 6.56 percent, and the one-year deposit rate from 3.5 to 3.25 percent. In addition, banks have been given the freedom to set the rates they pay on deposits and charge for loans.

Latest reports indicate economic growth (measured by Gross Domestic Product) in the January-March period fell to 8.1 percent and had declined further to 7.7 percent by the end of the first five months.  Some private financial estimates place 2012 GDP growth in a range of 7.7 percent to 7.9 percent, compared with 9.2 percent last year.

In the cotton sector, Cotlook paints a discouraging picture, in which spinners are unable to replace their raw cotton needs at manageable prices, and the government has been forced to import significantly more cotton than desired yet still support producers at the farm level.  China’s imports this season have already reached almost to 4.5 million tons, suggesting the season’s total may reach 5.2 million (more than twice normal), given the size of the outstanding commitment from the United States, together with that from Australia, said Cotlook.

Weak prices during the past month for raw materials (domestic and imported cotton, polyester and viscose staple fibers) have been accompanied by falling prices for yarn and fabric, which has contributed to a pessimistic view of the market outlook by most spinners, according to a report from Beijing Cotton Outlook, an eight-year-old joint venture between Cotlook, Ltd., the China National Cotton Exchange and the China Cotton Association.

In its report, Cotlook said “that since early June, cotton yarn prices have been on a downward trend in Henan, Shandong and Zhejiang; a number of small cotton spinning, weaving and garment factories have advanced their summer vacations, and small to medium-sized textile enterprises have recorded a substantial decline in the amount of cotton consumed, and some 60 percent of that used is said to have been imported. Other references have been directed toward a decline in the quality of output. Enterprises are struggling to maintain meagre profit levels.”

Meantime, Cotlook reported that Madame Zhu Beina, president of the China Cotton Textile Association, said at a May cotton trade summit in Chengdu that yarn output in 2011 was well below official figures, at around 20,500,000 tons, and noted that the association’s data showed a three percent decline in output during the first four months of 2012. Moreover, without a strong recovery during the final six months, this year’s annual total likely will fall to less than 20 million tons.

Other factors contributing to the industry’s pessimism include:

• A significant decline in the competitiveness of Chinese-spun lower count yarns,
• A below-normal fabric trade prompting some companies to reduce capacity on fear of further losses, and
• Orders at dyeing factories placed at no more than a couple of weeks out.

 Questions:  What signs suggest that China’s economic downturn may be nearing a bottom?

Since China no longer appears to be immune to the cyclical nature of global economic health, are there implications for the country’s intermediate and long term prospects for cotton and textiles along the supply chain?