Required Report - public distribution

**Date:** 5/14/2004

**GAIN Report Number:** AR4028

AR4028

**Argentina**

**Cotton and Products**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Robert K. Hoff

U.S. Embassy

**Prepared by:**

Kenneth N. Joseph

**Report Highlights:**

Argentine cotton production for Marketing Year (MY) 2004 (August
2004-July 2005) is estimated at 135,000 metric tons, higher than the
past three crops. Producers are expected to expand planted area
primarily because of good returns. With a stable domestic consumption,
imports are forecast to drop to 15,000 tons, with Brazil and Paraguay as
the main suppliers. Exports are projected to increase at 30,000 tons,
with Latin American countries being the main destination.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Buenos Aires \[AR1\]

\[AR\]

Table of Contents

[Section I. Situation and Outlook 2](#section-i.-situation-and-outlook)

[Section II. Statistical tables 2](#section-ii.-statistical-tables)

[Section III. Narrative on Supply and Demand, Policy and Marketing
2](#section-iii.-narrative-on-supply-and-demand-policy-and-marketing)

[Production 2](#production)

[Consumption 2](#consumption)

[Trade 2](#trade)

# Section I. Situation and Outlook

Argentine cotton exports for MY2004 (August 2004-July 2005) are
projected at 30,000 metric tons, significantly higher than the past two
crops, but still very low compared to the volume exported during the
1990s. Larger exports are the result of an increase in production, due
to good returns in MY2003/04. Profitability is expected to continue in
MY2004.

Due to the sharp reduction in export surpluses over the past several
crops, Argentine shipments were directed primarily to South American
destinations. Over 50 percent of cotton exports during calendar years
2001-03 went to Brazil, Chile and Peru. The balance was shipped
primarily to Asia (Taiwan, Philippines, India and Thailand) and some to
the European Union (EU) (Italy, Germany and Portugal). Most exports in
MY2004 are expected to go to these same markets.

Traders indicate that exports for MY2004 will be made primarily of
cotton harvested in 2005 (February-June). Some cotton of the MY2003 crop
will probably be exported in the second part of 2004. Although supply
and demand in MY2003 is quite tight, spinners are thought to have good
stocks (3-4 months' use) of both imported and domestic product.
Therefore, their demand has slowed down during the peak of the harvest,
forcing prices to go down. If this situation continues, some gins will
want/need to export some product. Exports are made primarily of the top
and the low-end quality, leaving average grades for the local industry.
One of the largest textile companies in the country is now owned by
Brazilians, who also operate a company in Chile, and trade cotton among
the countries of the Southern Cone.

In 2002, the Argentine Government (GOA), in order to come to grips with
increased expenses, implemented export taxes ("retenciones"), setting
the tax on cotton at 5 percent. The local cotton sector has tried to
convince the GOA, so far at no avail, to eliminate the tax in order to
help the recovery of production. It is doubtful this will happen,
because other sectors would follow with similar requests. Please note
that Argentine cotton exports benefit from a 2.7 percent rebate,
partially negating the negative effect of the export tax. Please also
note that in 2003, export taxes assessed on agricultural products
generated revenues of close to US\$2 billion, which the GOA has used to
support social and infrastructure projects.

Cotton imports for MY2004 are forecast at 15,000 tons, significantly
lower than the previous two years, as a result of projected larger
output and unchanged domestic consumption. These imports are expected to
arrive in the country during the last semester of 2004. Almost all
imports will come from the Brazilian state of Mato Grosso (located in
the Center-West of Brazil). The Brazilian cotton has very good quality
and uniformity, and has been well received by Argentine spinners. Some
shipments will also arrive from neighboring Paraguay. Most imports are
carried out by the largest local spinners, which buy mostly strict low
middling grades.

Most traders believe that cotton from the United States has little
chance to penetrate the Argentine market due to higher tariffs, freight
costs, and price. Furthermore, some contacts opine that spinners have
grown very accustomed to the Brazilian and Paraguayan product. Cotton
imported from Mercosur countries (Mercosur is composed of Argentina,
Uruguay, Paraguay, and Brazil) is duty free, while that of the United
States and other origins faces a tariff of 7.5 percent. However, large
textile companies, which export yarn and other products, can make use of
the temporary import program, through which they do not pay the tariff
as long as they export products within a year.

The recent ruling handed down by World Trade Organization's (WTO)
dispute resolution panel against the U.S. cotton support program, which
favored Brazil, is not expected to have an immediate impact on the
market. However, the local agricultural sector is now more optimistic
about the future WTO negotiations on agricultural subsidies.

Argentine cotton production for MY2004 is projected at 135,000 tons, the
highest of the past three years. Good returns in the MY2003, due to
fairly good prices and lint yields, and expected higher cost of
production for soybeans in MY2004, should encourage medium and large
producers to expand cotton area.

The Argentine cotton complex is operating with much excess capacity. As
an example, in the mid 1990s, planted area was more than three times
that which is expected for MY2004. Therefore, there are a significant
number of gins, harvesters, and other equipment that are under-utilized.
There is, in the main, little new investment, but leading producers
continue to incorporate new technology in order to increase yields and
lower costs.

The quality of the last two crops was very good, averaging between
strict low middling and low middling grades. The main reason for this is
that weather for both crops was dry. Producers are again using local
seed varieties, which have been in use for decades, as the incorporation
of some varieties from the U.S. did not turn out as expected. The use of
Bt cottonseed has dropped, but local Round up-ready seed is gaining
popularity, as ginning yields are much higher.

Cotton in Argentina is considered to be a "social" crop, as it is
produced by many small farmers in northern provinces that have limited
economic possibilities. These producers normally plant, on the average,
five hectares, and the entire family does almost all the work, including
harvesting. Therefore, as is the norm, post expects that provincial
governments will provide some help to encourage cotton production. A few
private entities have presented the GOA with some plans to expand cotton
production. They propose the elimination or the postponement of taxes
that affect the cotton industry. The GOA is studying the possibility of
providing some help, but nothing has been decided yet.

# Section II. Statistical tables

+-----------+-------+-------+-------+-------+-------+-------+-------+
| #######   |       |       |       |       |       |       |       |
| PSD Table |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| ##        | #     |       |       |       |       |       |       |
| ###### Co | ##### |       |       |       |       |       |       |
| untry {#c |  Arge |       |       |       |       |       |       |
| ountry-1} | ntina |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| Commodity | ###   |       |       |       | (HEC  |       |       |
|           | ### C |       |       |       | TARES |       |       |
|           | otton |       |       |       | )(MT) |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
|           | **2   | *     | **2   | **    | **2   | **    | **    |
|           | 002** | *Revi | 003** | Estim | 004** | Forec | UOM** |
|           |       | sed** |       | ate** |       | ast** |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
|           | *     | *     | *     | *     | *     | *     |       |
|           | *USDA | *Post | *USDA | *Post | *USDA | *Post |       |
|           | Off   | Est   | Off   | Est   | Off   | Est   |       |
|           | icial | imate | icial | imate | icial | imate |       |
|           | \[Ol  | \[Ne  | \[Ol  | \[Ne  | \[Ol  | \[Ne  |       |
|           | d\]** | w\]** | d\]** | w\]** | d\]** | w\]** |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **Market  |       | *     |       | *     |       | *     | *     |
| Year      |       | *08/2 |       | *08/2 |       | *08/2 | *MM/Y |
| Begin**   |       | 002** |       | 003** |       | 004** | YYY** |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| ####      | 0     | 1     | 0     | 2     | 0     | 3     | (HECT |
| ##### Are |       | 58000 |       | 64000 |       | 30000 | ARES) |
| a Planted |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **Area    | 1     | 1     | 2     | 2     | 0     | 3     | (HECT |
| Ha        | 48000 | 48000 | 50000 | 50000 |       | 20000 | ARES) |
| rvested** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **        | 86873 | 13849 | 83389 | 16849 | 89050 | 29849 | (MT)  |
| Beginning |       |       |       |       |       |       |       |
| Stocks**  |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **Pro     | 63141 | 65000 | 94711 | 1     | 0     | 1     | (MT)  |
| duction** |       |       |       | 00000 |       | 35000 |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **        | 55303 | 55000 | 43545 | 38000 | 0     | 15000 | (MT)  |
| Imports** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **TOTAL   | 2     | 1     | 2     | 1     | 89050 | 1     | (MT)  |
| SUPPLY**  | 05317 | 33849 | 21645 | 54849 |       | 79849 |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **        | 5661  | 7000  | 10886 | 5000  | 0     | 30000 | (MT)  |
| Exports** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **USE     | 1     | 1     | 1     | 1     | 0     | 1     | (MT)  |
| Dom.      | 14306 | 08000 | 19750 | 18000 |       | 18000 |       |
| Cons      |       |       |       |       |       |       |       |
| umption** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **Loss    | 1960  | 2000  | 1960  | 2000  | 0     | 2000  | (MT)  |
| Dom.      |       |       |       |       |       |       |       |
| Cons      |       |       |       |       |       |       |       |
| umption** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **TOTAL   | 1     | 1     | 1     | 1     | 0     | 1     | (MT)  |
| Dom.      | 16266 | 10000 | 21710 | 20000 |       | 20000 |       |
| Cons      |       |       |       |       |       |       |       |
| umption** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **Ending  | 83389 | 16849 | 89050 | 29849 | 0     | 29849 | (MT)  |
| Stocks**  |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+
| **TOTAL   | 2     | 1     | 2     | 1     | 0     | 1     | (MT)  |
| DISTR     | 05316 | 33849 | 21646 | 54849 |       | 79849 |       |
| IBUTION** |       |       |       |       |       |       |       |
+-----------+-------+-------+-------+-------+-------+-------+-------+

# Section III. Narrative on Supply and Demand, Policy and Marketing

## Production

Cotton planted area for MY2004 is projected to increase to 330,000
hectares, significantly higher than the previous year. The main reasons
for this are: (a) good profitability in MY2003; (b) the competition of
soybeans could diminish somewhat as its costs of production will
increase considerably due to the appearance of soy rust and a
significantly higher price for gliphosate, wildly used in roundup-ready,
no-till soybean production; (c) despite the higher cost of production
for cotton, farmers' much better economic situation will also encourage
producers to plant cotton, which has a higher return per hectare than
soybeans; (d) medium sized producers, which used to rent land for
soybeans, are finding it harder to compete with the high prices which
large producers are paying, and will probably plant their own land,
refocusing on cotton; (e) some farmers did not plant in MY2003/2004 the
area they had initially targeted due to dry weather; (f) somewhat
stronger support from the provincial governments directed to small
producers; and (g) cotton in the province of Chaco, the principal
growing area for cotton, has proved to be less riskier than soybeans,
especially during dry seasons.

Leading producers are adopting, with very good success, the practice of
planting in narrow furrows. This innovation is being embraced slowly by
the leading growers. It is estimated that fewer than 10,000 hectares
have been planted under this new system.

Planted area to cotton in Argentina is only estimated because there is a
lack of thorough fieldwork. Based on the available numbers, most sources
roughly calculate that the average yield of raw cotton is near 1.3 tons
per hectare, with top producers well above 2 tons per hectare. The
average ginning ratio is normally between 32-33 percent. Argentina's
average quality is normally exemplified by low middling grades. However,
due to dry weather in MY2002and MY2003, both ginning ratios and lint
quality have been higher.

Based on information recently released by the National Institute of
Agricultural Technology (INTA), medium and large producers who use good
technology, obtain much higher returns per hectare from cotton than from
soybeans. The following table provides a comparison of production costs
and income, but it does not include overhead costs (prices are in pesos
per hectare -- exchange rate is 2.95 pesos to the dollar):

  ------------------------- ---------------------- -----------------------
                            **Cotton**             **Soybeans**

  **Yield (Tons/Hectare)**  2.2                    2.6

  **Gross Income**          2,376                  1,742

  **Production Cost**       480                    355

  **Harvest Cost**          299                    174

  **Marketing Cost**        191                    294

  **Gross Return**          **1,406**              **919**
  ------------------------- ---------------------- -----------------------

Soybeans is the only crop which can compete with cotton in the cotton
producing area, as return of other crops, such as corn, sunflower and
sorghum is considerably lower. However, if the GOA approves Round-Up
Ready Corn, a transgenic corn variety, corn will also be competitive
with cotton.

With 85 percent of the harvest completed, cotton output for MY2003 is
now estimated higher at 100,000 tons, although some sources state that
it could even be somewhat larger. After the very dry summer, rainfall
returned to normal levels in March, and cotton plants reacted more than
favorably. In many cases lint yields per hectare were higher than
expected, as dry weather made most bolls open and reduced the incidence
of rotten ones. In general, there was also a low incidence of insects.
More than 10,000 hectares were lost during this season due, primarily,
to drought. Even in the province Santiago del Estero, where there is an
area of about 20,000 hectares under irrigation, producers could not
obtain the necessary amount of water.

## Consumption

Cotton domestic consumption for MY2004 is projected at 120,000 tons, the
same as in MY2003. Although imports of products have recently increased,
the local production of textiles remains strong. Sales have increased
due to import substitution (prior to the sharp devaluation of the
Argentine peso in 2002, about 50 percent of textile sales were imported)
and to a recovering economy. Most of the textiles produced locally are
sold domestically, while only a small portion, primarily yarn, is
exported. Exports slowed down as the peso strengthened during 2003.

Argentina is currently importing large volumes of denim from Brazil, as
well as products that are not manufactured locally, such as very fine
quality clothes or inexpensive ones.

## Trade

See Section I