Lowenstein, Frank

English

Research Papers in Economics

NATURE  OF  THE  CRISIS  IN  COTTON
Frank Lowenstein
Staff  Economist,  Office  of  the  Secretary
U.S.  Department of  Agriculture
The  surplus  problem  for  cotton  is  now  the  worst  of  any  major
agricultural  commodity.  Our  stocks  of  upland  cotton  on  August  1
of  this  year  were  16.6  million  bales,  a  record  high  and  about  one-
third  larger  than disappearance  during  the  1965-66  marketing  year.
Furthermore,  during  the  past  five  years,  production  of  cotton  in  the
United  States  has  consistently  been  larger  than  demand,  and  carry-
over  stocks have  grown  at  an average  rate  of  almost  2  million bales
per  year.
The accumulation  of  surplus stocks  of commodities  is  not unique
in  our  country.  For  example,  in  1961,  our  stocks  of  wheat  and  of
feed  grains  were  greatly  in  excess  of  any  reasonable  reserve  level.
The carryover  of  wheat  in  that year  was  1.4  million  bushels-more
than  a  full  year's  disappearance.  Stocks of feed  grains  were  85  mil-
lion  tons-twice  the  level  needed  for  any  predictable  contingency.
It has taken  us  approximately  five  years  to  work our  way  out  of
the  grain  surplus  position  of  1961.  But  we  have  done  it.  For  feed
grains,  we  anticipate  that the  carryover  at  the end of the current  sea-
son,  next  September  30,  will  be  at  a  level  we  can  call  a  reserve-
not  a  surplus.  A  sharp  increase  in  the wheat  acreage  allotment  for
the  1967  crop has  been  announced-16  million  acres  more  in  1967
than  in  1966.  The  wheat  and  feed  grain  problems  were  solved  by
increasing  demand  and restraining  production.
The  demand  for  wheat  in the world  has  increased  as  population
has  grown.  World  population  is  growing  at  a  rate  of  better  than  2
percent  a  year.  Most  of  this  population  growth  is  occurring  in  de-
veloping  countries,  and  the production  of food  grains  in these  coun-
tries  is  not increasing  as  fast  as population.
The  demand  for  feed  grains  is  also  increasing  because  of  rising
population  and, perhaps even  more important,  because  of rising con-
sumer  income  in  the  industrialized  countries.  As  income  rises,  the
consumption  of  livestock  products  also  increases.
There  are  no  major  substitutes  for  wheat  and  feed  grains.  On
the  other  hand, cotton  grown  in the United  States  faces  severe  com-
petition  from  two  sources:  (1)  man-made  fibers  and  (2)  sharply
rising  cotton  production  in  other  countries.  The  competitive  situ-
ation  influences  the  kind of cotton  program  which  may be  successful.
59The solution  to the  surplus  problem  for  cotton  will  be more  difficult
than  was  the  solution  of  the  surplus  problem  for  wheat  and  feed
grains.  Nevertheless,  we  must  solve  this  problem  for we  cannot  con-
tinue  to  carry  stocks  of cotton  which  are  considerably  larger  than  a
year's  disappearance  and,  furthermore,  we  cannot  continue  to accu-
mulate  ever  larger  surpluses  with  each  passing  year.
If we are to stop the  accumulation  of  surpluses  and reduce  stocks
of cotton,  production  should  be  restricted,  and  disappearance  should
be  stimulated.  In  times  of  need,  production  control  is  a  temporary
expedient  to  help  restrain  surplus  accumulations  and  to  help  dis-
pose  of  surpluses  already  in  existence.  However,  restriction  of  pro-
duction  cannot  be  temporary  unless  disappearance  tends  to  increase
over  the  years  at  a  steady  and  respectable  rate.
It is  necessary  for  disappearance  to  grow,  because  our  produc-
tion has  grown  and  will  continue  to  increase  even  with  constant  or
slightly  declining  acreage.  Yields  per  acre  are  steadily  rising,  and
disappearance  must  rise  in  order  to  absorb  the  output  of  our  in-
creasingly  efficient  cotton  farmers  (Figure  1).
Consumption of  cotton by our  domestic  mills was  between  8 and
9  million bales  each  year  from  1956  through  1963  except for  1957
when  it  dropped  to  7.9  million  bales.  Consumption  remained  static
LB.  I  I
60(
40C
20(
0
195C)-51  55-56  60-61  65-66
*9-  YEAR MOVING AVERAGE,  CENTERED,  PER HARVESTED ACRE.  1966-67  ESTIMATED
FIGURE  1.  COTTON  YIELDS  PER ACRE.  SOURCE:  USDA,  ECONOMIC
RESEARCH  SERVICE.
60
)  I  Average  yied*
)  - Actual  yield
I  I  I  I  I  I  I  I  I  I  I  IIwhile  population  and  consumer  income  increased.  This  means  that
consumption  of  cotton  per  person  declined  despite  growth  in  eco-
nomic  forces  which  have  a  stimulating  effect  on  fiber  consumption.
Consumption  of  man-made  fibers  increased,  and  imports  of  cotton
textiles  increased  sharply  at the  same  time  that  exports  of  such  tex-
tiles  declined.  In other  words,  fibers  competing  with  cotton  absorbed
most  of the increase  in demand  for  fibers,  and  textiles manufactured
abroad  absorbed  some  of  the  larger  market,  although  their  pene-
tration  covered  only  a  small  part  of  the  market.
During the late  1950's  and the early  1960's,  we priced our cotton
for  export  at  20  to  30  percent  below  the  price  for  which  we  sold
cotton  to  domestic  mills  and  at  which  we  supported  prices  for  our
cotton  farmers.  This  policy  enabled  rayon  and  acetate  to  substitute
for  cotton  because  mills  could  buy  these  fibers  cheaper  than  they
could purchase  cotton.  At  the  same  time,  domestic  mills  were  stead-
ily  and  rapidly  increasing  their use  of noncellulosic  man-made  fibers
(polyester,  acrylic,  nylon,  etc.).  Although  these  fibers  were  and  are
much  more  expensive  than  cotton,  the  price  discrepancy  is  not  so
great  as  commonly  thought.  This  stems  from  the  fact  that  less  than
one  pound  of  noncellulosic  man-made  fibers  is  required  to  do  the
same  job  as  a pound of  cotton.  Therefore, the  price  of the  noncellu-
losic  man-made  fibers  required  to  replace  a pound  of  cotton  is  less
than the price for a pound  of these fibers.  Nevertheless,  cotton prices,
even  ort an adjusted  basis,  are  well below the prices  for noncellulosic
man-made  fibers.
One  way to  summarize  this  situation  is  to  express  the  consump-
tion  of  other  fibers  in  the  United  States  in  cotton  equivalent  units.
Under  this  procedure  we  adjust  the pounds  of  other  fibers  used  in
the  United  States  so  that they  show  the  quantity  of  cotton  required
to  replace  them.  Also,  the  fibers  used  to  manufacture  imported  tex-
tiles  are  added  to domestic  mill consumption,  and  the  fibers  used  to
manufacture  exported  textiles  are subtracted.
This  analysis  shows  a  bleak  picture  (Figure  2).  In  1946  cotton
held  about 73  percent of  the total  fiber market in the  U.S.  and  man-
made  fibers  held  about  21  percent.  Cotton's  share  declined  steadily
and  in  1965  cotton  held  only  44  percent,  but  man-made  fibers'
share  had  increased  to  53  percent.  In  1965,  rayon  and  acetate  ac-
counted  for  about  20  percent,  and  noncellulosic  man-made  fibers
held  33  percent  of  the  total  fiber  market.  In  1946,  noncellulosic
man-made  fibers held  less than  1.5 percent  of this market,  but  rayon
held  about  the  same  percentage  as  in  1965.
Over  this  nineteen-year  period,  cotton  has  steadily  lost  ground,
61PERCENT  C1
Cotton
rr80  1-f^t^  |  ,Average  annual rate  of  change:
,-_"%  fa-1.3  percentage  points
6"0  "''-1.  .Man-made
-- Actual  ~Cto
,--  Trend  I.b Cotton
'fA  ^I\  __ ___  _________  L.We  '  ______Cto
,__l_  Man-made
20  _  Average  annual  rate  of change:-
1.4  percentage  points
_n  I  IL  I  II  I  I  I  Il  I  I I I I i  I  I I I  I I  I I
1935  1940  1945  1950  1955  1960  1965
FIGURE  2.  U.S.  DOMESTIC  FIBER  CONSUMPTION  IN  COTTON  EQUIVALENT
POUNDS  (COTTON  AND  MAN-MADE  FIBERS  AS  A  PERCENT  OF  TOTAL  FIBER
CONSUMPTION).  SOURCE:  USDA, ECONOMIC  RESEARCH  SERVICE.
relative  to  other  fibers,  rayon  has  about  held  its  own,  and  non-
cellulosic  man-made  fibers  have  gained  sharply  and  steadily.  How-
ever,  these  shares  are  parts  of  a  larger  pie.  Fiber  consumption  in
the  U.S.,  in  cotton  equivalent  units,  in  1965  was  about  72  percent
larger  than  in  1946.  But  almost  all  of  the  increase  was  taken  up
by  other  fibers,  and  cotton  consumption  increased  less  than  5  per-
cent  from  1946  to  1965.
At  the  same  time  that  domestic  mill  use  of  cotton  was  stag-
nating  at  relatively  low  levels,  our  exports  of  cotton  declined.  From
1956  to  1965,  our  exports  fell  despite  an  export  price  that  was
maintained  at about  24 to 26 cents  per pound.  This  change  occurred
because  foreign  cotton  production  was  growing  faster  than  foreign
cotton consumption.  In other words,  foreign  producers  found  it quite
attractive  to rapidly  expand  their cotton production.  As  a result,  our
export  markets  shrank  rapidly.
The  history  of exports  of  the  last  ten  years  is  most  illuminating
(Figure  3).  From  1956  through  1965,  United  States  exports  of
cotton  declined  at  an  average  rate  of  5.8  percent  a  year.  Our  ex-
ports  declined  from  about  7.6  million  bales  in  1956  to  2.9  million
bales  in  1965.  On the  other hand,  exports  of  cotton  from  other  free
world  countries  moved  in the  opposite  direction.  They  increased  at
an annual  rate  of  6.4  percent  a  year-rising  from  6.6  to  11.8  mil-
lion bales  from  1956  to  1965.
Production  of  cotton  in  the  foreign  free  world  over  the  past  ten
62MIL. BALES-
M1.  BALES  Foreign  Free  World 14
___12  ;Average  annual  rate  of  change  = 6.4%
10
\  I  /  \
4  \  4 I
\  /  United  States
Average  annual  rate  of change  =-5.8%
1956  58  60  62  64  66
FIGURE  3. COTTON  EXPORTS:  UNITED  STATES  AND FOREIGN  FREE  WORLD.
SOURCE:  USDA,  ECONOMIC  RESEARCH  SERVICE.
years  has  been  increasing  at  an  average  rate  of  4.3  percent  a  year.
In  contrast,  consumption  abroad  (foreign  free  world)  has  been  in-
creasing  at a rate  of only  2.9  percent  a  year.  If these  trends  were  to
continue,  production  in the foreign free  world would  equal  consump-
tion  in  about  1971  (Figure  4).
The other  factor  in the falling  demand  for  U.S.  cotton  abroad  is
the  rapid  growth  in foreign  use  of  man-made  fibers,  just  as  in  this
country.  In  1965,  the  consumption  of  man-made  fibers  abroad  was
equivalent  to  24.8  million  bales  of  cotton-almost  ten  times  the
figure  for  1946.  A  slowing  of  the  growth  in  the  use  of  man-made
fibers  would  increase  demand  for  cotton,  and  the  U.S.  could  export
more  cotton.
The  passage  of  the  Food  and  Agriculture  Act  of  1964  helped
cotton  to  compete  with  rayon  domestically.  As  a result,  cotton  con-
sumption  has  increased  sharply  in  the  past  year  while  the  rate  of
increase  in  rayon  and  acetate  consumption  has  slowed  sharply.  As
time  goes  by,  the  lower prices  for  cotton  are  expected  to cause  fur-
ther  increases  in  cotton  consumption  at  the  expense  of  rayon  and
acetate.
The  1964  act,  however,  did  not  affect  export  prices  for  our
cotton,  and  our  exports  continued  to  shrink.  For  the  1965-66  mar-
keting  year  our  exports  fell  to  only  2.9  million  bales.
633
15  5  '  'i'' 1  95  I  I  I  I  I  I  I I  I  I  I  I  '70
1955  '60  '65  '70
Crop  year  beginning  Aug.  1
500 pound  gross  weight  bales
*
Plotted  on  ratio  scale  where  equal  vertical  distances  represent  equal  percentage  changes
FIGURE  4.  FOREIGN  FREE WORLD  PRODUCTION  AND  CONSUMPTION  OF
COTTON.  SOURCE:  USDA,  STAFF  ECONOMISTS  GROUP.
Despite  larger  consumption  of  upland  cotton,  which  was  9.4
million bales  in  1965-66,  small  exports  held  total  disappearance  to
below  13  million  bales.  This  disappearance  was  about  2  million
bales  lower  than  production.
The  Food and Agriculture  Act  of  1965  will,  it is  hoped, help  to
cure  the  dilemma  in  which  the  cotton  industry  finds  itself.  We  do
not  expect  to reduce  the  carryover  of  16.6  million  bales  to  5,  6,  or
7 million  bales in one year.  But, we do expect  a substantial reduction
in  the  carryover  by  the  time  the  act  expires  on  July  31,  1970.
The  objectives  of  the  new  legislation  are  clear.  The  act  is  de-
signed to reduce  our surpluses,  to market  our cotton  at a price  which
will  stimulate  the  disappearance  of  American  cotton,  and  to  main-
tain  farm  income  at  a  reasonable  level.
The  programs  under  the  act  are  designed  to  encourage  farmers
to  reduce  their  acreage  so  that  production  of  cotton  in  the  United
States  will  be  smaller  than  disappearance.  The  difference  between
disappearance  and  production,  the  short  fall,  will  be  supplied  from
CCC stocks. In this  way,  the  world's  surplus  cotton  stocks  which  are
now held by CCC will be reduced.
The  key  to  stimulating  the  disappearance  for U.S.  cotton  lies  in
the  pricing arrangements  specified  in  the  act.  In  essence  the  supply
of,  and  the  demand  for,  cotton  in  the  entire  world  will  affect  the
64price  for  which  U.S.  cotton  is  sold  at  home  and  abroad.  Foreign
cotton producers  can  no  longer expect  the  United  States  to  hold  a
relatively  high  price  umbrella  over  their  cotton  production  regard-
less  of  the  quantity  of  cotton produced  abroad.  Rayon  producers  at
home  and  abroad  can  no  longer  expect  profitable  prices  simply
because  cotton  prices  in  the  United  States  are  supported  at  levels
which  ignore  competition  from  other  fibers.
Because  these two competitors  (foreign  grown cotton and rayon)
will  be forced  into  taking  more  risks  than in  the past,  expansion  in
the production  and use  of them  is expected  to decline.  Cotton  grown
in  the  United  States  will  have  the  opportunity  to  fill  some  of  the
demand  that  would  have gone  to  these  competitors  in  the past.
Manufacturers  of  noncellulosic  man-made  fibers  will  also  have
to consider  the  new  competitive  position  of  U.S.  cotton.  Future  ex-
pansion  of production  facilities  for  the  noncellulosics  may  not  be  as
rapid  as  it would have  been under  previous programs,  but expansion
at home  and  abroad  probably  will  still be  dangerously  fast.
Cotton  must  acquire  additional  new  and  improved  quality
characteristics  to  meet  the  competition  from  noncellulosic  man-
made  fibers.  Such  improvement  can  be  developed  only  through
effective  research  in  breeding  and  in  the  chemical  laboratories.  As
these  new  and  improved  characteristics  are  developed,  promotion
and  service  programs  will  be  useful  in  introducing  them  to  textile
manufacturers,  to  merchandisers,  and  to  ultimate  consumers.
Research  and  promotion  programs  are  aspects  of  cotton's  com-
petitive  problems  which  are  not  touched  by  the Food  and  Agricul-
ture  Act  of  1965.  Nevertheless,  they  are  important  if  the  cotton
industry  in  the  United  States  hopes  to  have  its  product  utilized  in
commercial  markets  in  the  future.
The  acreage  harvested  to  cotton  for  the  1966  crop  is  only  9.8
million  acres-the  smallest  acreage  harvested  to  cotton  in  nearly  a
hundred  years.  With  larger  disappearance  coupled  with  restricted
acreage  and  smaller  output,  stocks  may  be  reduced  by  4  million
bales  in  the  first year  of  operation  of  the  new  program.  This  situa-
tion  is  the  start  for  the cotton  industry  in  reducing  its  huge  surplus.
It  is  a  move  toward  getting  the  industry  to  stand  on  its  own  two
feet  with  a minimum  of  government  help.  If the  carryover  continues
to  decline  in  subsequent  seasons,  the  Food  and  Agriculture  Act  of
1965  will  have  served  the cotton  industry  well.
Even  with  large  diversion  during  the  transition  period,  we  do
not  expect  farm  income  to  suffer.  Because  of  diversion  payments,
65net  farm  income  will probably  be higher  than  under  preceding  pro-
grams.  Farmers  simply  do  not  have  to  incur  many  of  the  expenses
required  in connection  with  production  in order  to receive  the  diver-
sion  payments,  and  net farm  income  will  rise.  However,  funds  used
to purchase  production  goods  and  services  will  be  smaller.
A  program  such  as  outlined  above  for  cotton  has  implications
for  others  than  those  engaged  in  agriculture  in  the  United  States.
As  mentioned  above,  cotton production  abroad  has  increased  sharp-
ly  over  many  years,  and  most  of  this  increase  has  occurred  in  the
developing  countries.  The  Food  and  Agriculture  Act  of  1965  states
that  future price-support  loans  shall  be  set  at not more  than  90  per-
cent  of the estimated  world  market price.  In other  words,  the  supply
of,  and  demand  for,  cotton  in  the  entire  world  will  affect  the  level
of  the CCC  loans.  The  agricultural  development  plans  of  other  cot-
ton producing  countries,  their plans  for  economic  development,  and
their  plans  for  earning  foreign  exchange  will  reflect  this  change  in
our  policy.
The  rayon  industry  in  this  country  and  abroad  developed  dur-
ing  a  period  when  we  supported  the  price  of  our  cotton  and  the
price  other  countries  received  for cotton  at  a  relatively  high  level.
Under  our  new  policy,  the  supply  of,  and  the  demand  for,  cotton
in  the  world  probably  will  cause  prices  for  cotton  to  decline  below
levels  which  would  stimulate  larger  production  of  rayon.  In  time,
competition  from  cotton  could  even  cause  rayon  production  to  de-
cline,  but  this  is  a long-term  prospect  which  probably  will  not  ma-
terialize for several  years.
It seems  quite  apparent  from our  experience  over  the past thirty-
two years  that  high prices  for  cotton lead  to  losses of  markets.  Once
a market  is  lost,  it  is  most  difficult  to  regain  it.  Therefore,  we  can-
not  afford  to deliberately  increase  the price  of the  fiber  in  the  future
through  governmental  action,  nor  can  we  afford  to  let  our  com-
petitors  believe  that  we  plan  such  action.  The  cotton  industry  must
use every  tool at  its  disposal to  regain  and  hold  its  markets.
The  Food  and  Agriculture  Act  of  1965  is  designed  to  stimulate
disappearance  and  dispose of our  surplus  cotton.  Part of this disposal
program  involves  the  limitation  of  production  for  a  few  years  and
part  involves  the  permanent  stimulation  of  demand  for  U.S.  cotton.
If this program  is  successful,  the  cotton  industry  will  start  to  receive
the  benefits  of larger  demand  for  its product  a  few  years  from  now.
These  benefits  will  continue  for  many  years  into  the  future,  and
production  of cotton will increase.  We  must,  however,  dispose  of  our
surplus cotton before we  can look forward  to larger output.
66

NATURE OF THE CRISIS IN COTTON

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