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World Cotton Situation

Special section: South America regional update – cotton production, exports, imports, domestic consumption and outlook for Argentina, Brazil, Colombia, Paraguay and Peru for marketing years 1985/86 through 1991/92

Special section: South America regional update – cotton production, exports, imports, domestic consumption and outlook for Argentina, Brazil, Colombia, Paraguay and Peru for marketing years 1985/86 through 1991/92 – U.S. Dept. of Agriculture, Foreign Agricultural Service report

Kevin Sage-El

BACKGROUND

The five major cotton producing and exporting nations in South America include Argentina, Brazil, Colombia, Paraguay, and Peru. Production and trade projections for MY 1991/92 will each account for slightly over 98 percent of the region’s output and exports. The five major producers and exporters are also anticipated to produce 8 percent of the world’s output and export 11 percent of world trade in MY 1991/92. Cotton production, consumption and exports in most of the economies of this region are experiencing the economic side effects of anti-inflationary government programs. These macroeconomic policies in the region, designed to reduce government deficits and slow down private spending, led to the current trend of recession in most of the major cotton producing countries in South America. This in turn led to declines in domestic demand for textiles. In an attempt to fight inflation and reduce spending in both the public and private sector, credit backed by central banks also became scarce in these major cotton producing countries in South America.

INFLATION RATES FOR SOUTH AMERICA’S TOP PRODUCING COUNTRIES

(Annual Percentage Rate of Change in Consumer Price Index)

1987 1988 1989 1990

ARGENTINA NA 387 4923 1500

BRAZIL 366 934 1765 1794

COLOMBIA 24 28 28 31

PARAGUAY 22 23 30 NA

PERU 115 1722 2775 7650

NA: not available.

Sources: USDA Cotton Annual Reports and U.S. Department of

State Economic Trends Reports.

PRODUCTION

Between marketing years 1980/81 and 1990/91, the five major cotton producing countries in South America produced an average of 7 percent of the world’s cotton crop. For MY 1991/92, forecasts and projections indicate that the region will produce approximately 8 percent of the world’s cotton crop. Brazil’s output as a percentage of that for the five major producers in the region is expected to be about 50 percent. This level has been maintained since MY 1986/87. Argentina averaged 17 percent during the same period followed by Paraguay with approximately 14 percent of production in the region. In most of the region, about 70 to 85 percent of cotton produced is of an upland variety with staple lengths ranging from 13/16 to 1-5/32 inch. Peru produces a substantial amount of ELS (Tanguis) and Pima cotton. This amount ranged between 30 and 42 percent, respectively, of their own crop since MY 1985/86. Production among the major cotton producing countries as a whole has not shown a consistent year-to-year increase since MY 1985. While unfavorable weather has contributed to this problem, the primary factor has been the consequences resulting from the inflation fighting policies. They have restricted needed credit to purchase imported inputs such as fertilizer and pesticides. The pressures of recession have also lowered domestic demand for textiles, thereby influencing a decline in raw cotton production and stocks. Favorable price supports and the planting of shorter season varieties in many of the countries has resulted in a shorter growing season, thereby allowing for the planting of soybeans, corn and rice.

EXPORTS

South America’s cotton exports in marketing year 1991/92 are expected to reach approximately 2.7 million 480-lb. bales. This quantity is 190 percent higher than that exported from this region a decade ago. Although Brazil has been the region’s major producer of cotton for more than 20 years, with a projected 50 percent of the region’s output in MY 1991/92, Paraguay has exported the most cotton for a single country in the region since MY 1983/84. Paraguay is expected to export in excess of 1 million bales in both MY 1990/91 and MY 1991/92. Exports have been gradually increasing as a whole for the South American region in response to slowed domestic demand for textiles, the need for foreign exchange, and favorable world cotton prices. Similar to the other major exporters in the region, Colombia’s increased production is in direct response to favorable world cotton prices. Currently, Colombian producers will be able to sell as much of their cotton on the world market as they wish without the government restrictions that have existed in the past. The importance of agriculture and cotton varies among the major producing countries in South America as a contributor to gross domestic product (GDP) and foreign exchange earnings. Cotton exports in Paraguay fluctuate between 30 and 40 percent of export earnings. In Brazil, a much more industrialized country, agriculture contributes only 10 percent and cotton less than one percent to GDP. Agriculture accounts for over 20 percent of Colombia’s GDP and more than 50 percent of foreign exchange, but cotton accounts for less than 1 percent of its total exports. Agriculture in Peru varies between 1 and 2 percent of GDP and cotton exports average about 17 percent of the total value of agriculture. In Argentina, agriculture accounts for 14 percent of GDP and 35 percent of export earnings. Cotton accounts for only 10 percent of agricultural export earnings and 1 percent of total export earnings. In addition, the major exporters are altering trade policies to increase cotton exports to world markets. While Argentina continues to protect its domestic cotton industry with import tariffs and inspection fees, they are rapidly being phased out. Cotton exports in Argentina receive differential export taxes. Moreover, Argentina has been promoting cotton trade with other South American countries, by granting them preferential tariffs. Peru does not have any export restrictions or subsidies. World prices for Peru’s Tanguis cotton, however, is lower than its domestic cotton prices, and cotton exports to countries such as Japan may decline in MY 1991/92 due to expected crop shortfalls. Paraguay’s government has eliminated the cotton export tax, a process initiated in 1989. World market forces now influence Paraguay’s producer prices. Exporters, however, still complain about the prevailing exchange rate, insisting that the Paraguayan Guarani is overvalued. Brazil’s cotton exports are assessed a 13-percent state movement tax and are sold under an overvalued exchange rate.

IMPORTS

Imports among the major cotton producing countries in South America have increased by 800 percent since MY 1980/81. Imports for the entire region are projected to increase further to 190,000 bales for MY 1991/92. The extremely high percentage change in imports for the region shows the vast improvements toward a much more viable domestic textile industry, primarily among most of the five major exporters. However, world imports as a percentage of supplies since MY 1980/81 averaged approximately 19 percent, while that for the five major South American producers averaged 3 percent. Despite the growth in imports, more supplies have been targeted for export markets rather than domestic consumption. Individually, most of the countries in the region do not import much cotton. Brazil, the region’s largest importer, purchases much cotton for blending purposes and to supplement tight supplies, a market held primarily by Paraguay. Argentina imports cotton from the United States in order to take advantage of more favorable financing terms. However, Paraguay maintains an advantage over the United States because of its close proximity to Argentina. Colombia’s textile mills import cotton during times of crop shortfall. The major supplier for Colombia has been Venezuela. The United States was the sole supplier in MY 1990/91 with 3,700 bales. In Colombia, textile and apparel exporters would like to have access to adequate supplies of cotton in order to maintain newly acquired foreign markets. Peru and Paraguay do not show any recorded cotton imports. Paraguay’s domestic mill consumption is relatively small in comparison to its export markets for raw cotton. Peru has lifted its cotton import prohibition which should allow it to import lower quality cotton for domestic fabric production. The other countries import higher quality cotton for use in their respective domestic mill operations. Imports have shown a steady increase in recent years in response to liberalization of import trade tariffs.

DOMESTIC CONSUMPTION

From MY’s 1980/81 to 1991/92, cotton consumption for the five major producers in the region increased 41 percent to a projected 4.9 million bales. In comparison, world cotton consumption increased 33 percent during the same period. Consumption in the region as a percentage of total supplies (beginning stocks, production, and imports) remained steady, averaging 42 percent from MY 1980/81 to MY 1991/92, while the world total average is 60 percent. This pattern shows that consumption levels among the five major countries is increasing at a faster rate than the world average, and may soon approach world consumption levels. Consumption in the region varies among the major cotton producers depending on the level of textile production for both domestic consumption and export markets. For example, the level of consumption in Brazil is extremely significant where consumption as a percentage of production has been over 100 percent every year since MY 1986/87. The situation in Brazil reflects the importance of the domestic textile industry which translates into large cotton imports. In Paraguay, the contribution of raw cotton to foreign exchange earnings is reflected in the low ratio of consumption. This ratio has remained at 5 percent since MY 1986/87. In Argentina, consumption as a percentage of production declined since MY 1985/86 and has settled around 40 percent each year, reflecting increased attention toward exporting raw cotton for foreign exchange. In Peru, domestic consumption of cotton for textiles is evident with an averagee of 82 percent of production since MY 1985/86 going toward consumption. The textile mills in Peru have been experiencing a weak domestic economy and are finding markets within the European Community. In Colombia, domestic consumption of cotton has averaged 68 percent since MY 1985/86 where consumption and exports have been steadily increasing over the past 3 years. Thus the Colombian textile industry has been responding to growth in its own domestic market, while finding new exports markets. In recent years, domestic consumption in the region has been negatively influenced by extremely high interest rates and slow consumer demand for textiles and apparels. However, the decline in domestic consumption has been offset by increased market opportunities in Spain, the United Kingdom, Germany, Hungary, and Yugoslavia.

OUTLOOK

In the near term, the region will continue to battle problems of inflation and recession. However, Paraguay, Brazil, Uruguay, and Argentina have proceeded in their plans to form an economic union called Mercosul, the Southern Cone Common Market. This union calls for significant reductions in tariffs on all commodities by 1995. The creation of this common market should encourage increased free trade of cotton within the region as trade restrictions are eliminated. On a larger scale, it can be expected that some benefits could accrue if the Uruguay Round trade talks are successfully concluded. The current level of high world cotton prices should also encourage increased production and lead to larger cotton exports from South America for destinations in Europe and Asia. Continued regional economic growth can lead to increased trade among the countries in the region. The effect of trade liberalization should result in increased marketability of U.S. cotton to the region in the future. Countries such as Brazil, Peru, Colombia, and Argentina should be a more immediate source for expanding markets as their economies recover from recession and increase their consumption of cotton for textiles and apparels. In Peru, the import prohibition has been lifted and the United States should enjoy a transportation advantage. However, Peru’s phytosanitary requirements call for fumigation in the country of origin. The U.S. vacuum fumigation facility should serve as an advantage in meeting those requirements. Nevertheless, U.S. exports will still be hampered if local mills are expecting that import duties on potential U.S. cotton imports will make trading with other Andean countries more feasible. In Colombia, with its import tariffs being lifted, the United States can compete on the same basis for that market with the other exporters in the region. Meanwhile, in the short run, Paraguay may be limited as an expanding import market as approximately 90 percent of its export earnings come from agriculture. Argentine imports of U.S. cotton are expected to remain small since only a few local textile firms take advantage of the favorable financing terms offered by the United States, and Paraguay enjoys a locational advantage in that market. So, in the short term, U.S. exports should find destinations in Brazil, Argentina, and Colombia. In the long run, the major cotton producers in South America can be expected to continue exporting the bulk of their supplies for foreign exchange earnings. Meanwhile, U.S. cotton exports to the five major exporters in South America could increase if consumption levels in the region continue to expand at its current rate. Some sources expect Brazil’s supplies to fall short of its consumption needs, possibly leading to importing some U.S. long staple cotton later in the 1991/92 marketing year. Brazil and Colombia can be expected to import increased amounts of raw cotton in the future if their textile exports increase to the United States and Europe. With respect to raw cotton exports, the five major exporting countries in South America can be expected to compete with the United States in Europe and the Far East. [Tabular Data Omitted]

Kevin Sage-El, Cotton Analyst for Africa and Latin America, Tobacco, Cotton, and Seeds Division, Foreign Agricultural Service, USDA.

COPYRIGHT 1991 U.S. Department of Agriculture

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