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- CRB Fundamentals - 2008 Commodity Articles


Cotton is a natural vegetable fiber that comes from small trees and shrubs of a genus belonging to the mallow family, one of which is the common American Upland cotton plant. Cotton has been used in India for at least the last 5,000 years and probably much longer, and was also used by the ancient Chinese, Egyptians, and North and South Americans. Cotton was one of the earliest crops grown by European settlers in the U.S.

Cotton requires a long growing season, plenty of sunshine and water during the growing season, and then dry weather for harvesting. In the United States, the Cotton Belt stretches from northern Florida to North Carolina and westward to California. In the U.S., planting time varies from the beginning of February in Southern Texas to the beginning of June in the northern sections of the Cotton Belt. The flower bud of the plant blossoms and develops into an oval boll that splits open at maturity. At maturity, cotton is most vulnerable to damage from wind and rain. Approximately 95% of the cotton in the U.S. is now harvested mechanically with spindle-type pickers or strippers and then sent off to cotton gins for processing. There it is dried, cleaned, separated, and packed into bales.

Cotton is used in a wide range of products from clothing to home furnishings to medical products. The value of cotton is determined according to the staple, grade, and character of each bale. Staple refers to short, medium, long, or extra-long fiber length, with medium staple accounting for about 70% of all U.S. cotton. Grade refers to the color, brightness, and amount of foreign matter and is established by the U.S. Department of Agriculture. Character refers to the fiber's diameter, strength, body, maturity (ratio of mature to immature fibers), uniformity, and smoothness. Cotton is the fifth leading cash crop in the U.S. and is one of the nation's principal agricultural exports. The weight of cotton is typically measured in terms of a "bale," which is deemed to equal 480 pounds.

Cotton futures and options are traded on the New York Cotton Exchange, a division of the New York Board of Trade. Cotton futures are also traded on the Bolsa de Mercadorias & Futuros (BM&F). Cotton yarn futures are traded on the Central Japan Commodity Exchange (CCOM) and the Osaka Mercantile Exchange (OME). The New York Cotton Exchange's futures contract calls for the delivery of 50,000 pounds net weight (approximately 100 bales) of No. 2 cotton with a quality rating of Strict Low Middling and a staple length of 1-and-2/32 inch. Delivery points include Texas (Galveston and Houston), New Orleans, Memphis, and Greenville/Spartanburg in South Carolina.

Prices - Cotton prices on the New York Board of Trade nearest-futures chart in 2007 moved lower in the first half of the year to a 1-year low but then rallied sharply during the remainder of the year. Cotton prices ended 2007 at 68.01 cents per pound, up +21% y/y and at a 4-3/4 year high. Cotton prices continued higher in early 2008 and posted a 12-year high of 91.38 cents per pound in March 2008. Cotton prices were supported during 2007 by a -29% decline in the 2007-08 planted acreage to 10.8 million acres planted from the 15.3 million acres planted in 2006-07. With prices of other crops rising more than cotton prices during 2007, the markets were looking for a sharp -11.8% decline in planted cotton acres to 9.5 million acres for the 2008-09 growing season, which would be a 25-year low. Cotton prices in early 2008 were also supported by abnormally dry conditions in the major cotton growing areas of the U.S. Southeast and National Weather Service (NWS) forecasts for continued dry conditions into spring 2008, due to La Nina effects. However, cotton is sometimes a preferred crop for dry conditions, which means continued dryness could boost planted acres. Cotton stocks fell mildly in 2007-08 with U.S carryover down -0.8% y/y to 9.40 million bales and global carryover down -3% to 59.16 million bales.

Supply - World cotton production in 2006-07 rose +2.5% yr/yr to 116.750 million bales (480 pounds per bale) but still down from the record high of 120.120 million bales seen in 2004-05. The world's largest cotton producers are China with 27% of world production in 2006-07, the U.S. with 19%, India with 18%, and Pakistan with 8%. World beginning stocks in 2006-07 rose +0.1% yr/yr to 53.947 million bales, recovering further from the 9-year low of 43.031 million bales seen in 2004-05.

The U.S. cotton crop in 2007-08 fell by -12.6% yr/yr to 18.862 million bales, down from the 2005-06 record high of 23.890 million bales. U.S. farmers harvested 10.543 million acres of cotton in 2007-08, down 17.2% yr/yr. The U.S. cotton yield in 2007-08 rose +5.5% to 859 pounds per acre, which was a new record high. The leading U.S. producing states of Upland cotton are Texas with 27% of U.S. production in 2006, Arkansas (12%), Mississippi (10%), Georgia (10%), and California (7%). U.S. production of cotton cloth has fallen sharply by almost half in the past decade due to the movement of the textile industry out of the U.S. to low-wage foreign countries. Specifically, U.S. production of cotton cloth in 2007 fell -7.5% yr/yr to a record low of 2.062 billion square yards, less than one-fourth of the production level seen in 1950.

Demand - World consumption of cotton in 2006-07 rose by +4.9% yr/yr to 118.796 million bales, which was a new record high. Consumption of cotton continues to move toward countries with low wages, where the raw cotton is utilized to produce textiles and other cotton products. The largest consumers of cotton in 2005-06 were China (40%), India (15%), and Pakistan (10%). U.S. consumption of cotton by mills in 2006-07 fell -11.7% yr/yr to 5.200 million bales, and accounted for 24% of U.S. production. The remaining 76% of U.S. cotton production went for exports.

Trade - World exports of cotton in 2006-07 fell by -13.7% yr/yr to 38.535 million bales, down from the 2005-06 record high. The U.S. is the world's largest cotton exporter by far and accounts for 36% of world cotton exports. Key world cotton importers include Turkey with 8% of total world imports in 2006-07, Indonesia with 6%, Mexico with 4%, and Russia with 4%. U.S. cotton exports in 2006-07 fell by 32.3% yr/yr to 12.212 million bales, down from last year's record high of 18.039 million bales. The main destinations for U.S. exports in 2006-07 were China (30%), Mexico (10%), Indonesia (8%), Taiwan (4%), and Thailand (4%).

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