Required Report - public distribution

**Date:** 5/4/2007

**GAIN Report Number:** MX7035

MX0000

**Mexico**

**Cotton and Products**

**Annual**

**2007**

**Approved by:**

![](media/image1.wmf)Erich Kuss

U.S. Embassy Mexico City

**Prepared by:**

Benjamin Juarez and Jeff Nawn

**Report Highlights:** MY 2007/08 domestic cotton production is forecast
to increase by approximately 5.8 percent to 683,000 bales. This forecast
is based on a planted area estimate of 127,000 hectares, and the
assumption that the Mexican government will maintain its target-price
support program for cotton (see MX6037). Domestic cotton consumption,
however, is forecast to decrease slightly in MY 2007/08 from the
previous year's revised estimate. This decline is a result of stagnant
demand from the textile industry, the main consumer of cotton in Mexico.
As a result, imports are forecast to remain largely unchanged from the
MY 2006/07 level of 1.5 million bales.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Unscheduled Report

Mexico \[MX1\]

\[MX\]

Table of Contents

[**SECTION I. SITUATION AND OUTLOOK
3**](#section-i.-situation-and-outlook)

[SECTION II. STATISTICAL TABLES 4](#section-ii.-statistical-tables)

[PS&D Table 4](#psd-table)

[Trade Matrices 5](#trade-matrices)

[SECTION III. NARRATIVE ON SUPPLY, DEMAND, POLICY, & MARKETING
7](#section-iii.-narrative-on-supply-demand-policy-marketing)

[Production 7](#production)

[Consumption 8](#consumption)

[Trade 9](#trade)

[Stocks 9](#stocks)

[Marketing 9](#marketing)

[Textile Industry 9](#textile-industry)

# SECTION I. SITUATION AND OUTLOOK

MY 2007/08 domestic cotton production is forecast to increase by
approximately 5.8 percent to 683,000 bales. This forecast is based on a
planted area estimate of 127,000 hectares, and the assumption that the
Mexican government is going to continue its target-price support program
for cotton (see MX6037). The Confederation of Mexican Cotton
Associations (CMCA) has stated that growers will not be able to expand,
or even maintain current levels of cotton production, without this
government support. The CMCA estimates that approximately 60,000
hectares will be planted with genetically modified seed varieties in MY
2007/08, an increase of approximately 20 percent over last year.

Due to revised official data from the Secretariat of Agriculture,
Livestock, Rural Development, Fisheries and Foodstuffs (SAGARPA), and
preliminary information from private sources, USDA/Mexico estimates for
cotton production, and planted and harvested areas for MY 2006/07 were
adjusted upward. Similarly, MY 2005/06 production and harvested area
estimates were revised slightly based on official SAGARPA figures.

Domestic cotton consumption is forecast to decrease by approximately 2.5
percent in MY2007/08 from the previous year's revised estimate. Consumer
demand for apparel and textile products will likely decrease next year
as Mexico's apparel and textile exports continue to lose market share in
the United States. The main cotton consumer in Mexico continues to be
the textile sector.

Another factor that will continue to adversely affect domesti*c* cotton
consumption is the growing volume of foreign apparel and textiles
entering Mexico, which has depressed demand for domestically produced
products. At the same time, the expected slowdown in economic growth in
2007 will lead to lower levels of consumer purchasing power, and thus a
decline in the growth of apparel spending. The outlook for the Mexican
economy this year is less favorable than that of CY 2006. Mexico's Gross
Domestic Product (GDP) is forecast to grow by 3.1 percent in 2007,
compared to 4.46 percent growth in 2006. Inflation is also playing a
significant role in apparel spending patterns. From March 2006 to
February 2007 year-over-year inflation was roughly 4.1 percent. That is
far lower than the triple-digit inflation experienced in the 1980's, but
it is well above the central bank's target rate of 3 percent.

As a result of the above-mentioned factors, Mexico is expected to import
approximately 1.5 billion bales of cotton in MY 2007/08, approximately
the same volume as MY 2006/07. The U.S. is expected to maintain its
dominant market share of cotton imports, as practically all cotton
imports are sourced from the United States. The import estimates for MY
2005/06 and 2006/07 have been revised upward and downward, respectively,
reflecting official data from the Secretariat of Economy (SE) and
preliminary information from the CMCA. Similarly, the MYs 2005/06 and
2006/07 cotton export estimates have both been revised downward,
reflecting both SE official figures and industry sources.

With imports remaining unchanged in MY 2007/08, ending stocks are
projected to decline to 1.185 million bales, tightening the
stocks-to-use ratio to 53.4 percent, compared to a 54.9 percent
stocks-to-use ratio in MY 2006/07.

# SECTION II. STATISTICAL TABLES

## PS&D Table

<table>
<colgroup>
<col style="width: 13%" />
<col style="width: 9%" />
<col style="width: 10%" />
<col style="width: 9%" />
<col style="width: 10%" />
<col style="width: 0%" />
<col style="width: 9%" />
<col style="width: 0%" />
<col style="width: 8%" />
<col style="width: 0%" />
<col style="width: 7%" />
<col style="width: 8%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td>PSD Table</td>
<td colspan="12"></td>
</tr>
<tr class="even">
<td><strong>Country</strong></td>
<td colspan="12"><strong>Mexico</strong></td>
</tr>
<tr class="odd">
<td><strong>Commodity</strong></td>
<td colspan="3"><h6 id="cotton">Cotton</h6></td>
<td colspan="9"><strong>(HECTARES) 1000 480 lb.
Bales(PERCENT)(KG/HA)</strong></td>
</tr>
<tr class="even">
<td></td>
<td colspan="3"><strong>2005 Revised</strong></td>
<td colspan="6"><strong>2006 Estimate</strong></td>
<td colspan="3"><strong>2007 Forecast</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><p><strong>USDA</strong></p>
<p><strong>Official</strong></p></td>
<td><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p></td>
<td><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p>
<p><strong>New</strong></p></td>
<td colspan="2"><p><strong>USDA</strong></p>
<p><strong>Official</strong></p></td>
<td colspan="2"><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p></td>
<td><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p>
<p><strong>New</strong></p></td>
<td colspan="2"><p><strong>USDA</strong></p>
<p><strong>Official</strong></p></td>
<td><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p></td>
<td><p><strong>Post</strong></p>
<p><strong>Estimate</strong></p>
<p><strong>New</strong></p></td>
</tr>
<tr class="even">
<td>Market Year Begin</td>
<td colspan="3">08/2005</td>
<td colspan="6">08/2006</td>
<td colspan="3">08/2007</td>
</tr>
<tr class="odd">
<td>Area Planted</td>
<td>0</td>
<td>130</td>
<td>130</td>
<td>0</td>
<td colspan="2">115</td>
<td colspan="3">116</td>
<td>0</td>
<td>0</td>
<td>127</td>
</tr>
<tr class="even">
<td>Area Harvested</td>
<td>126</td>
<td>127</td>
<td>126</td>
<td>115</td>
<td colspan="2">114</td>
<td colspan="3">115</td>
<td>0</td>
<td>0</td>
<td>124</td>
</tr>
<tr class="odd">
<td>Beginning Stocks</td>
<td>1319</td>
<td>1354</td>
<td>1319</td>
<td>1324</td>
<td colspan="2">1218</td>
<td colspan="3">1394</td>
<td>1134</td>
<td>1019</td>
<td>1247</td>
</tr>
<tr class="even">
<td>Production</td>
<td>635</td>
<td>627</td>
<td>635</td>
<td>635</td>
<td colspan="2">617</td>
<td colspan="3">648</td>
<td>0</td>
<td>0</td>
<td>683</td>
</tr>
<tr class="odd">
<td>Imports</td>
<td>1744</td>
<td>1562</td>
<td>1840</td>
<td>1500</td>
<td colspan="2">1562</td>
<td colspan="3">1500</td>
<td>0</td>
<td>0</td>
<td>1500</td>
</tr>
<tr class="even">
<td>MY Imports from U.S.</td>
<td>1742</td>
<td>1560</td>
<td>1838</td>
<td>1498</td>
<td colspan="2">1560</td>
<td colspan="3">1498</td>
<td>0</td>
<td>0</td>
<td>1498</td>
</tr>
<tr class="odd">
<td><p id="total-supply" class="heading">Total Supply</p></td>
<td>3698</td>
<td>3543</td>
<td><strong>3794</strong></td>
<td>3459</td>
<td colspan="2">3397</td>
<td colspan="3"><strong>3542</strong></td>
<td>1134</td>
<td>1019</td>
<td><strong>3430</strong></td>
</tr>
<tr class="even">
<td>Exports</td>
<td>249</td>
<td>300</td>
<td>275</td>
<td>250</td>
<td colspan="2">350</td>
<td colspan="3">220</td>
<td>0</td>
<td>0</td>
<td>220</td>
</tr>
<tr class="odd">
<td>Use</td>
<td>2100</td>
<td>2000</td>
<td>2100</td>
<td>2050</td>
<td colspan="2">2003</td>
<td colspan="3">2050</td>
<td>0</td>
<td>0</td>
<td>2000</td>
</tr>
<tr class="even">
<td>Loss</td>
<td>25</td>
<td>25</td>
<td>25</td>
<td>25</td>
<td colspan="2">25</td>
<td colspan="3">25</td>
<td>0</td>
<td>0</td>
<td>25</td>
</tr>
<tr class="odd">
<td>Total Dom. Cons.</td>
<td>2125</td>
<td>2025</td>
<td>2125</td>
<td>2075</td>
<td colspan="2">2028</td>
<td colspan="3">2075</td>
<td>0</td>
<td>0</td>
<td>2025</td>
</tr>
<tr class="even">
<td>Ending Stocks</td>
<td>1324</td>
<td>1218</td>
<td>1394</td>
<td>1134</td>
<td colspan="2">1019</td>
<td colspan="3">1247</td>
<td>0</td>
<td>0</td>
<td>1185</td>
</tr>
<tr class="odd">
<td><strong>Total Distribution</strong></td>
<td>3698</td>
<td>3543</td>
<td><strong>3794</strong></td>
<td>3459</td>
<td colspan="2">3397</td>
<td colspan="3"><strong>3542</strong></td>
<td>0</td>
<td>0</td>
<td><strong>3430</strong></td>
</tr>
<tr class="even">
<td>Stock to Use %</td>
<td>56.364410</td>
<td>52.956521</td>
<td>58.694736</td>
<td>49.304347</td>
<td colspan="2">43.306417</td>
<td colspan="3">54.933920</td>
<td>0</td>
<td>0</td>
<td>53.378378</td>
</tr>
<tr class="odd">
<td>Yield (KG/HA)</td>
<td>1097</td>
<td>1075</td>
<td>1097</td>
<td>1202</td>
<td colspan="2">1178</td>
<td colspan="3">1227</td>
<td>0</td>
<td>0</td>
<td>1199</td>
</tr>
</tbody>
</table>

# 

# 

## Trade Matrices

+----------------+-------------+---+--------------+---+-------------+---+
| **Cotton**     | ######## H. |   |              |   | **UNITS:    |   |
|                | T.S. 520100 |   |              |   | MT**        |   |
|                | 02. 5201000 |   |              |   |             |   |
|                | 3, 52010099 |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| **[Exports     | MY          |   | MY 2005/2006 |   | MY          |   |
| to:]           | 2004/2005   |   |              |   | 2006/2007  |   |
| {.smallcaps}** |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| U.S.           | 8,020       |   | 5,689        |   | 127         |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Chin          | 19,146      |   | 33,187       |   | 6,793       |   |
| a]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [JAPA          | 4,257       |   | 1,475        |   | 1,039       |   |
| N]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Guatemal      | 502         |   | 0            |   | 0           |   |
| a]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Vietna        | 2,179       |   | 7,188        |   | 3,543       |   |
| m]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Taiwa         | 1,409       |   | 2,333        |   | 882         |   |
| n]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Indonesi      | 979         |   | 3,416        |   | 5,092       |   |
| a]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Others not    | 1,665       |   | 6,678        |   | 4,722       |   |
| liste          |             |   |              |   |             |   |
| d]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+
| [Grand         | 38,157      |   | 59,966       |   | 22,198      |   |
| tota           |             |   |              |   |             |   |
| l]{.smallcaps} |             |   |              |   |             |   |
+----------------+-------------+---+--------------+---+-------------+---+

**SOURCE**: World Trade Atlas, Mexico Edition, January 2007.

MY begin August ends July. Data as of January 2007.

  ------------------------- ----------------- --- -------------- --- -------------- ---
  **Cotton**                **H.T.S.                                 **UNITS: MT**  
                            52010002.                                               
                            52010003,                                               
                            52010099**                                              

  **[Imports]{.smallcaps}   MY 2004/2005          MY 2005/2006       MY 2006/2007  
  [from:]{.smallcaps}**                                                             

  U.S.                      400,374               382,027            123,460        

  [Cameroon]{.smallcaps}    [0]{.smallcaps}       0                  0              

  [Mali]{.smallcaps}        [0]{.smallcaps}       0                  0              

  [Others not               266                   425                155            
  listed]{.smallcaps}                                                               

  [Grand total]{.smallcaps} 400,640               382,452            123,615        
  ------------------------- ----------------- --- -------------- --- -------------- ---

**SOURCE**: World Trade Atlas, Mexico Edition, January 2007.

MY begin August ends July. Data as of January 2007.

  ------------------------- ------------------- ---- ------------------- ----
  **Cotton Yarn H.T.S.                               **UNITS: MT**       
  5205, 5206, 5207**                                                     

  **[Exports                CY 2005                  CY 2006             
  to:]{.smallcaps}**                                                     

  [United                   15,044                   11,661              
  States]{.smallcaps}                                                    

  [Canada]{.smallcaps}      525                      447                 

  [Guatemala]{.smallcaps}   182                      77                  

  [Colombia]{.smallcaps}    301                      2,567               

  [Other not                441                      567                 
  listed]{.smallcaps}                                                    

  [Grand Total]{.smallcaps} 16,493                   15,319              
  ------------------------- ------------------- ---- ------------------- ----

**SOURCE**: World Trade Atlas, Mexico Edition, January 2007.

  ----------------------- -------------------- --- ------------------- ---
  **Cotton Yarn H.T.S                              UNITS: MT           
  5205 , 5206 , 5207**                                                 

  **[Imports              CY 2005                  CY 2006             
  from:]{.smallcaps}**                                                 

  United States           6,756                    11,077              

  [El                     1,528                    924                 
  Salvador]{.smallcaps}                                                

  [Spain]{.smallcaps}     1,379                    1,483               

  [South                  827                      1,391               
  Korea]{.smallcaps}                                                   

  [Other not              1,176                    991                 
  listed]{.smallcaps}                                                  

  [Grand                  11,666                   15,866              
  Total]{.smallcaps}                                                   
  ----------------------- -------------------- --- ------------------- ---

**SOURCE**: World Trade Atlas, Mexico Edition, January 2007.

  --------------------------- ------------------- -- ----------------- ---
  **Woven Cotton Fabrics                             **UNITS: M^2^**   
  H.T.S. 5208, 5209, 5210,                                             
  5211, 5212**                                                         

  **[Exports                  CY 2005                CY 2006           
  to:]{.smallcaps}**                                                   

  United States               21,122,070             11,288,512        

  [Colombia]{.smallcaps}      7,462,267              12,254,950        

  [Cuba]{.smallcaps}          241,855                33,194            

  [HONG KONG]{.smallcaps}     723,917                38,418            

  [Other not                  2,758,028              4,038,616         
  listed]{.smallcaps}                                                  

  [Grand Total]{.smallcaps}   32,308,137             27,653,690        
  --------------------------- ------------------- -- ----------------- ---

**SOURCE**: World Trade Atlas, Mexico Edition, January 2007.

  --------------------------- ----------------- ---- --------------- -----
  Woven Cotton Fabrics                               **UNITS: M^2^** 
  **H.T.S. 5208, 5209, 5210,                                         
  5211, 5212**                                                       

  **[Imports                  CY 2005                CY 2006         
  from:]{.smallcaps}**                                               

  United States               60,652,182             123,748,006     

  [Brazil]{.smallcaps}        13,829,217             11,316,538      

  [Spain]{.smallcaps}         10,806,617             19,200,891      

  [India]{.smallcaps}         8,939,559              4,430,189       

  [Guatemala]{.smallcaps}     13,654,897             15,852,478      

  PAKISTAN                    11,569,470             8,376,357       

  [Other not                  36,418,312             40,196,109      
  listed]{.smallcaps}                                                

  [Grand Total]{.smallcaps}   155,870,254            223,120,568     
  --------------------------- ----------------- ---- --------------- -----

SOURCE: World Trade Atlas, Mexico Edition, January 2007.

# 

# 

#  

# SECTION III. NARRATIVE ON SUPPLY, DEMAND, POLICY, & MARKETING

## Production

MY 2007/08 Mexican cotton production is expected to increase to 683,000
bales, roughly a 5.4 percent increase over the MY 2006/07 revised
estimate. This estimated increase is primarily attributed to an eight
percent increase in harvested area, not to higher yields, and assumes
average weather conditions. According to several cotton growers, the
Government of Mexico (GOM) will continue to fund the Cotton Price
Support Program (See MX6037) in MY 2007/08. This program is vitally
important to cotton production in Mexico, as it is the main impetus for
many farmers to continue planting cotton. Producers insist that it would
not be economically feasible to grow cotton, let alone expand
production, without government support.

The MY 2007/08 planted cotton area, yield, and production forecast by
state is as follows:

+---------------------------------+----------+------------+------------+
| COTTON FORECAST MY 2007/08      |          |            |            |
+---------------------------------+----------+------------+------------+
| Region                          | Planted  | Yield      | Production |
|                                 |          |            |            |
|                                 | Area     | (Bales/Ha) | (Bales)    |
+---------------------------------+----------+------------+------------+
| South Sonora                    | 2,330    | 5.0        | 11,650     |
+---------------------------------+----------+------------+------------+
| North Sonora                    | 1,200    | 5.0        | 6,000      |
+---------------------------------+----------+------------+------------+
| Mexicali, Baja California       | 27,800   | 5.0        | 139,000    |
+---------------------------------+----------+------------+------------+
| Juarez, Chihuahua               | 40,000   | 5.0        | 200,000    |
+---------------------------------+----------+------------+------------+
| Delicias, Chihuahua             | 4,000    | 5.5        | 22,000     |
+---------------------------------+----------+------------+------------+
| Ojinaga & Aldama, Chihuahua     | 26,000   | 5.5        | 143,000    |
+---------------------------------+----------+------------+------------+
| La Laguna, Coahuila & Durango   | 20,000   | 7.5        | 150,000    |
+---------------------------------+----------+------------+------------+
| North Tamaulipas                | 3,000    | 4.0        | 12,000     |
+---------------------------------+----------+------------+------------+
| TOTAL                           | 124,262  | 5.5        | 683,350    |
+---------------------------------+----------+------------+------------+

Source: Confederation of Mexican Cotton Associations

The production estimate, as well as the planted and harvested area
estimates, for MY 2006/2007 have been revised upward. These changes
reflect the most recent CMCA figures. Similarly, the MY 2005/06
harvested area and production estimates have been revised slightly due
to the release of new data from the Secretariat of Agriculture,
Livestock, Rural Development, Fisheries and Foodstuffs (SAGARPA).

Cotton yields around the country vary significantly. Average cotton
yields for MY 2007/08 are expected to reach 5.5 bales/ha, with a range
of between 4.0 and 7.5 bales per hectare. The highest yield/ha is
expected in the La Laguna region, where the cotton growers have adopted
the use of genetically modified seed varieties. The Confederation of
Mexican Cotton Associations (CMCA) stated that biotechnology has been an
important tool in reducing pesticide use by more than 50 percent, as
well as stimulating an increase yields.

The CMCA estimates that in MY 2007/08 approximately 60,000 hectares of
cotton land will be planted with genetically modified seed varieties,
compared to the roughly 50,000 has that were planted in MY 2006/07. This
improved seed will mainly be planted in Chihuahua and the La Laguna
region (Coahuila and Durango states). In La Laguna, for example, nearly
66 percent of the 20,000 has of cotton have already been sown with
genetically modified seed. It should be noted that since the approval of
the Bio-safety Law in 2003 cotton growers have faced significant delays
in obtaining the proper governmental permits and authorizations for
genetically modified cottonseed. In fact, this past year bureaucratic
delays nearly prevented cotton farmers from receiving requisite
transgenic cottonseed permits in time for planting. Cotton growers in La
Laguna asked their respective Governors to intervene with the federal
government on their behalf in order to expedite the process.

In addition to the cotton price support program (See MX6037), a
flat‑rate payment of 963 pesos/ha (roughly U.S. \$86.52/ha) was granted
to cotton growers for the 2006 spring/summer crop cycle under PROCAMPO,
the Mexican domestic agriculture support program. The GOM policy is that
farmers with production areas of between one and five hectares will
receive 1,160 pesos per hectare (approximately U.S. \$104.22/ha). The
GOM has yet to announce the payment amount for the 2007 spring/summer
crop cycle.

Recently SAGARPA started using a new methodology to estimate production
costs of farm inputs for cotton and other important commodities. Total
input costs for cotton production, in the main cotton producing states
using this new estimation technique, are as follows:

+-----------------------------+----------------------+-----------------+
| **Cotton Production Cost    |                      |                 |
| Budget for Several States** |                      |                 |
|                             |                      |                 |
| **& Crop Cycles**           |                      |                 |
|                             |                      |                 |
| **(Pesos per Hectare)**     |                      |                 |
+-----------------------------+----------------------+-----------------+
| **State**                   | **2005**             | **2005/06**     |
|                             |                      |                 |
|                             | **Spring/Summer**    | **Fall/Winter** |
+-----------------------------+----------------------+-----------------+
| Sonora                      | 15,331.51            | N/A             |
+-----------------------------+----------------------+-----------------+
| Baja California (Mexicali)  | 14,526.20            | N/A             |
+-----------------------------+----------------------+-----------------+
| Chihuahua                   | 10,1810.86           | N/A             |
+-----------------------------+----------------------+-----------------+
| Coahuila (La Laguna)        | 19,958.46            | N/A             |
+-----------------------------+----------------------+-----------------+
| Tamaulipas                  | N/A                  | 8,413.80        |
+-----------------------------+----------------------+-----------------+

Exchange Rate as of April 23, 2007: U.S. \$1.00 = 11.09 Pesos

Source: SIAP/SAGARPA

### 

Large mills have continued to purchase U.S. cotton, as U.S. cotton is
considered to be of consistently higher quality, while the quality of
Mexican cotton continues to vary, and typically grades poorly, according
to industry sources. Although there are approximately 150 cotton gins in
Mexico, almost all are outdated and tend to damage the cotton during the
ginning process. Large textile firms use Universal HVI Calibration
Cotton Standards to sort the cotton by fiber length, strength,
micronaire (a measure of the cotton\'s fineness), color grade, color Rd
(reflectance), color +b (yellowness), and trash percentage. Mexican
growers, however, do not use such standards, and consequently only the
smaller mills use Mexican cotton for products designed for the domestic
market.

## Consumption 

The consumption estimates for MYs 2005/06 and 2006/07 have been revised
upward based on the most recent industry information. MY 2007/08
consumption estimates are forecast to decline by approximately 2.5
percent to 2 million bales. The textile industry has been under pressure
from more competitive foreign competition, thus growth in consumption
within this sector has been somewhat stagnant. Furthermore, FAS/Mexico
does not anticipate any increases in domestic cotton consumption in the
foreseeable future. There are two main users of Mexican cotton, the
textile industry and the oil industry.

Until 2005 Mexico was the dominant foreign supplier of cotton apparel to
the U.S. market. Mexican market share of the cotton apparel market
peaked in 2000, but in the last six years Mexican shipments are down by
38 percent. This decline is almost exclusively attributed to the fact
that Mexico's apparel and textile industry is losing domestic and U.S.
market share to low cost production countries such as China. Industry
sources estimate this trend will likely continue in MY 2007/08.

## Trade

Due to the virtually stagnant demand from the textile industry, imports
are forecast to remain unchanged at 1.5 million bales in MY 2007/08. The
United States is the single largest exporter of raw cotton to Mexico,
accounting for practically 100 percent of total cotton imports. Mexico
has relied heavily on U.S. imports to supply its export assembly plants,
known as Maquiladoras (in-bond companies). The import estimates for MYs
2005/06 and 2006/07 have been revised upward and downward, respectively,
reflecting official data from the Secretariat of Economy (SE) and
preliminary information from CMCA.

Mexican cotton exports in MY 2007/08 are expected to remain unchanged at
220,000 bales. Official trade statistics show that Mexico exported
59,966 MT for the marketing year ending July 2006. China was Mexico's
largest export destination, receiving around 55 percent of total
exports. Vietnam was second, receiving approximately 12 percent of total
exports, while Indonesia, Thailand and Japan were Mexico's next three
largest markets, respectively. The export figures for MY 2005 and MY
2006 have been adjusted downward. The changes to MY 2005 data are based
on official information from SE, while changes to MY 2006 data are based
on information from industry sources.

## 

## Stocks

## 

The estimated MY 2006/07 ending stocks were revised upward, due to
higher-than-previously estimated domestic production. Similarly, the
ending stocks estimate for MY 2005/2006 was revised upward as result of
higher than originally estimated production and imports. Mexico\'s
ending stocks are forecast to decrease to approximately 1.2 MMT in MY
2007.

## Marketing

## 

Industry consultants have reported that in order to remain a major
supplier of textiles and apparel to the United States, Mexican firms
should continue with their efforts to shift production from
low-value-added basic garments to high-quality and technology intensive
products. According to one industry source, faced with increasing
competitive pressure from countries such as China, Mexican apparel
producers should focus more on higher fashion, and brand-name products
that require smaller and more flexible runs. If both the apparel and
textile industries can achieve this, the demand for U.S. cotton could
rebound. In addition, the U.S. industry should continue with its
activities promoting the advantages of cotton textile products.

## 

## Textile Industry

After peaking in CY 2000, the Mexican textile has experienced a
protracted period of contraction, as illustrated by the following graph,
which charts industry output over the past 14 years.

![](media/image2.wmf)

Source: National Institute of Geography, Statistics and Computer
(INEGI).

According to industry sources, as result of this contraction,
approximately 500 companies have closed in the past six years,
eliminating roughly 280,000 jobs from the sector. Two reasons are
primarily cited for this contraction; a loss of market share in the
U.S., and foreign competition in the domestic market. Textile and
apparel producers in China and Hong Kong pose the greatest threat to
Mexico's industry, with lower labor costs and more efficient production
processes. Moreover, the outlook for 2007 does not support a dramatic
shift in these key factors, suggesting that the volume of Mexican
exports may decline further.

Mexico is competitive in the production of fibers, and the cutting,
assembly and export of garments. However, the country has not been able
to produce the quality fabric that is required for apparel, thus Mexico
still relies heavily on imported textiles. Industry sources report that
the creation of a commodity chain that uses Mexican textiles as main
input, and has the capacity to deliver a fully packaged product with
more value-added services is the key to the survival of the Mexican
textile sector.

The Mexican textile industry also continues to complain that many
textiles imported into Mexico have been brought in through methods
designed to evade appropriate import duties, which harms their industry.
Trade sources indicate, for example, that 60 percent of apparel
purchased on the Mexican market is contraband, 20 percent is coming
through illegal importation, and only 20 percent is domestic production.

On November 2006, the GOM published in the Mexican Federal Register
("Diario Oficial") a decree to regulate the "Maquila" industry, as well
as the export services program (Pitex). Pitex allows for the duty-free
importation of certain inputs used to manufacture products destined for
the export market. However, often times these finished products are not
exported, and are sold on the domestic market, creating an unfair
advantage for the manufacturers that imported the inputs duty-free
through Pitex. Industry sources hope that these illegal practices will
be put to and end with the new decree, as the Finance Ministry and
Customs (Hacienda) will now be sharing responsibility for supervision of
the Pitex program with SE and the maquila industry.

Less than 40 percent of the companies within the Mexican textile and
garment industry are classified as small businesses (fewer than one
hundred employees). Most of the companies that have survived are
large-scale vertically integrated firms that produce their own fiber and
woven fabrics, and do their own bleaching, dying, printing, and other
finishing. The Mexican textile industry encompasses a variety of firms
ranging from the fabrication of natural, artificial and synthetic
fibers, threads and weavings. Only the leading companies that export to
the U.S., such as Kaltex S.A., Lear Mexican Trim, Eagle Trading Co.,
Nova Distex, among others, have continued to invest in machinery and
equipment.

Industry sources pointed out that despite fierce international
competition, Mexico still has a comparative advantage in terms of labor
and production costs when compared with other countries in the Americas.
The country also has a transportation advantage over Central America and
the Caribbean region. Textile firms in Central America have recently
started to develop more efficient production processes. However, Mexican
industry sources report that these countries do not necessarily pose a
threat to Mexico as long as Mexican firms are flexible enough to rapidly
adapt to new market trends, and can improve their quality standards.
Some sources have also reported that there is an emerging opportunity
for Mexico to supply Central American countries with inputs as their
textile industries develop.

In an effort to stay competitive and viable, industry experts are
promoting a strategy of focusing on niche market segments in which
design and quality are more important than price. In the coming year the
industry will promote their ability to quickly produce a high- quality
finished product to private brands. To this end the industry will focus
on attracting business from the high fashion and high-end sector of the
market. All of these proposals necessitate that the Mexican industry
develop a cost structure that is flexible, competitive, and most
importantly, adaptable to rapidly changing market conditions.

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