Required Report - public distribution

**Date:** 05/13/2004

**GAIN Report Number:** MX4060

**Mexico**

Cotton and Products

**Annual Report**

2004

**Approved by:**

![](media/image1.wmf)David Williams

#### U.S. Embassy Mexico City

**Prepared by:**

Benjamin Juarez/Marco Arceo

**Report Highlights:**

Mexican cotton production is expected to increase by approximately 75
percent to 625,000 bales in MY 2004/05 (Aug-Jul), due to higher world
cotton prices and expected increases in government supports. Imports are
forecast to increase slightly to 2.150 million bales, as a result of the
recovery in the U.S. economy and the consequent increase in Mexico\'s
textile/apparel exports.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual 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)

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

[PRODUCTION 8](#production)

[PRODUCTION POLICY 8](#production-policy)

[YIELDS AND INPUTS 9](#yields-and-inputs)

[CONSUMPTION 9](#consumption)

[TRADE 10](#trade)

[STOCKS 10](#stocks)

[MARKETING 10](#marketing)

[TEXTILE INDUSTRY 11](#textile-industry)

#   {#section .unnumbered}

# SECTION I. SITUATION AND OUTLOOK

Mexican cotton production for MY 2004/05 is forecast at 625,000 bales
(480 lb./bale), an increase of 75 percent from the revised estimate of
MY 2003/04, due to higher world cotton prices, increased planted area,
and expectations of increased government supports. According to the
Confederation of Mexican Cotton Associations (CMCA*),* its planting
intentions survey revealed that Mexican producers have increased cotton
acreage by approximately 84 percent. It should be noted, however, that
this production forecast accounts for just 32 percent of total
consumption, with the rest coming from imports. Moreover, this
production forecast remains substantially below the average production
levels of the late 1990s. Production levels and planted area for the
previous two years were atypically low due to unattractive international
prices. The production estimates and harvested area for MY 2002/03 and
2003/04 were revised upward reflecting new official information from the
Secretariat of Agriculture, Livestock, Rural Development, Fisheries and
Foodstuffs (SAGARPA) as well as from private sources.

Domestic demand for cotton is forecast at 2.150 million bales in MY
2004/05, up approximately 2.3 percent from MY 2004/05. Consumer demands
for textile products will likely increase next year as result of the
recovery of the U.S. economy and a weaker peso. According to private
industry sources, Mexico's cotton industry is sensitive to the effects
of the depreciating Mexican peso, which increased the competitive
advantage of Mexico's textile exports to the United States. The peso has
devalued by about 10 percent against the dollar since last year. A main
user of Mexican cotton is the textile industry. The estimate for total
cotton consumption in MY 2002/03 and 2003/04 remained unchanged.

Compared to MY 2003/04 (Jul-Aug), Mexico is expected to import
approximately one percent more cotton and exports are expected to remain
constant in MY 2004/05. Two main factors limiting demand for cotton
imports are: 1) growing low-cost competition from China affecting
Mexico's apparel/textile exports to the United States; and 2) illegal
apparel/textile imports, mainly from Asian countries. Despite the fact
that the Mexican government has increased its efforts to deter illegal
imports, private sources pointed out that major measures have yet to be
implemented. The cotton import and export estimates for MY 2002/03 have
been revised upward according to official information form the
Secretariat of Economy (SE). Similarly, the MY 2003/04 cotton import
estimate has been revised slightly downward, reflecting more recent
information from industry sources. These industry sources stated that,
as of April 2004, Mexican MY 2003/04 imports totaled approximately
972,000 bales, leaving an estimated 719,300 bales of imports still
anticipated before the end of July 2004. With less than five months
remaining in the marketing year, weekly shipments need to average 51,300
bales in order to reach this import target, which is highly unlikely,
according to these industry sources. As usual, practically all of the
imports will be sourced from the United States. Mexican exports of
cotton to traditional markets in Asia are expected to remain unchanged
from the revised estimate of MY 2003/04, at 100,000 bales. With a slight
increase in mill use in MY 2004/05, ending stocks are projected to
decline to 563,000 bales, tightening the stocks-to-use ratio to 25.9
percent, compared to a 32.8-percent stocks-to-use ratio in MY 2003/04.

In reference to the economy, for the fourth quarter of 2003 and the
beginning of 2004 Mexico's economy grew slightly more-than-expected in
quarterly annualized terms. Private analysts indicate that the
1.3-percent GDP growth registered in 2003 was low and kept per-capita
income stagnant. However, the result from the last quarter of 2003 is
encouraging and economists forecast 2004 growth at 3.2 percent. At the
same time, inflation has been reduced over the last few years due to
tighter controls of the money supply. These factors should bolster
textile fiber consumption. Analysts pointed out that reviving Mexico's
textile/apparel exports would depend on continued U.S. economic growth,
as well as on Mexico's ability to compete with China.

# SECTION II. STATISTICAL TABLES

  ---------------- ---------- ------------ ---------- ------------ ---------------- ------------
  PSD Table                                                                         

  Country          México                                                           

  Commodity        Cotton                                          (HECTARES)(MT)   

                   2002                    2003                    2004 Forecast    
                   Revised                 Estimate                                 

                   USDA       Post         USDA       Post         USDA Official    Post
                   Official   Estimate     Official   Estimate     \[Old\]          Estimate
                   \[Old\]    \[New\]      \[Old\]    \[New\]                       \[New\]

  Market Year      08/2002                 08/2003                 08/2004          
  Begin                                                                             

  Area Planted     0          42351        0          63763        0                117300

  Area Harvested   38000      41494        58000      62430        0                103100

  Beginning Stocks 157199     157199       226653     231484       147183           151767

  Production       42239      44666        67495      77722        0                136000

  Imports          500771     507946       342919     327000       0                330000

  **TOTAL SUPPLY** 700209     **709811**   637067     **636206**   147183           **617767**

  Exports          10886      15658        27216      21770        0                21770

  USE Dom.         457226     457226       457226     457226       0                468055
  Consumption                                                                       

  Loss Dom.        5443       5443         5443       5443         0                5443
  Consumption                                                                       

  TOTAL Dom.       462669     462669       462669     462669       0                473498
  Consumption                                                                       

  Ending Stocks    226653     231484       147183     151767       0                122499

  **TOTAL          700208     **709811**   637068     **636206**   0                **617767**
  DISTRIBUTION**                                                                    
  ---------------- ---------- ------------ ---------- ------------ ---------------- ------------

+------------------+--------+------+--------+------+--------+------+
| PSD Table        |        |      |        |      |        |      |
+------------------+--------+------+--------+------+--------+------+
| Country          | Mexico |      |        |      |        |      |
+------------------+--------+------+--------+------+--------+------+
| Commodity        | Cotton |      | HE     |      |        |      |
|                  |        |      | CTARES |      |        |      |
|                  |        |      | & 480  |      |        |      |
|                  |        |      | lb Bal |      |        |      |
|                  |        |      | Conv   |      |        |      |
|                  |        |      | ersion |      |        |      |
|                  |        |      | 0.00   |      |        |      |
|                  |        |      | 459291 |      |        |      |
+------------------+--------+------+--------+------+--------+------+
|                  | R      |      | Es     |      | Fo     |      |
|                  | evised |      | timate |      | recast |      |
|                  | 2001   |      | 2002   |      | 2003   |      |
+------------------+--------+------+--------+------+--------+------+
|                  | USDA   | Post | USDA   | Post | USDA   | Post |
|                  | Of     | Esti | Of     |      | Of     | Esti |
|                  | ficial | mate | ficial | Esti | ficial | mate |
|                  | \      | \[N  |        | mate |        | \[N  |
|                  | [Old\] | ew\] | \      | \[N  | \      | ew\] |
|                  |        |      | [Old\] | ew\] | [Old\] |      |
+------------------+--------+------+--------+------+--------+------+
| Market Year      | 0      |      | 0      |      | 0      |      |
| Begin            | 8/2002 |      | 8/2003 |      | 8/2004 |      |
+------------------+--------+------+--------+------+--------+------+
| Area Planted     | 0      | 4    | 0      | 6    | 0      | 11   |
|                  |        | 2351 |        | 3763 |        | 7300 |
+------------------+--------+------+--------+------+--------+------+
| Area Harvested   | 38000  | 4    | 58000  | 6    | 0      | 10   |
|                  |        | 1494 |        | 2430 |        | 3000 |
+------------------+--------+------+--------+------+--------+------+
| Beginning Stocks | 722090 | 72   | 1      | 106  | 676082 | 69   |
|                  |        | 2090 | 041125 | 3316 |        | 7138 |
+------------------+--------+------+--------+------+--------+------+
| Production       | 194024 | 20   | 310037 | 35   | 0      | 62   |
|                  |        | 5172 |        | 7014 |        | 4713 |
+------------------+--------+------+--------+------+--------+------+
| Imports          | 2      | 233  | 1      | 150  | 0      | 151  |
|                  | 300280 | 3238 | 575191 | 2067 |        | 5847 |
+------------------+--------+------+--------+------+--------+------+
| #                | 3      | **3  | 2      | **2  | 676082 | **2  |
| ### TOTAL SUPPLY | 126394 | 2605 | 926353 | 9223 |        | 8376 |
|                  |        | 01** |        | 98** |        | 99** |
+------------------+--------+------+--------+------+--------+------+
| Exports          | 50005  | 7    | 125016 | 10   | 0      | 10   |
|                  |        | 1925 |        | 0000 |        | 0000 |
+------------------+--------+------+--------+------+--------+------+
| USE Dom.         | 2      | 210  | 2      | 210  | 0      | 215  |
| Consumption      | 100257 | 0257 | 100257 | 0257 |        | 0000 |
+------------------+--------+------+--------+------+--------+------+
| Loss Dom.        | 25002  | 2    | 25002  | 2    | 0      | 2    |
| Consumption      |        | 5002 |        | 5002 |        | 5002 |
+------------------+--------+------+--------+------+--------+------+
| TOTAL Dom.       | 2      | 212  | 2      | 212  | 0      | 217  |
| Consumption      | 125260 | 5260 | 125260 | 5260 |        | 5002 |
+------------------+--------+------+--------+------+--------+------+
| Ending Stocks    | 1      | 106  | 676082 | 69   | 0      | 56   |
|                  | 041125 | 3316 |        | 7138 |        | 2696 |
+------------------+--------+------+--------+------+--------+------+
| #### TO          | 3      | **3  | 2      | **2  | 0      | **2  |
| TAL DISTRIBUTION | 216390 | 2605 | 926357 | 9223 |        | 8376 |
|                  |        | 01** |        | 98** |        | 99** |
+------------------+--------+------+--------+------+--------+------+

  ------------------------- ---------------------- ---------------------- -----------------
  **Cotton** **H.T.S.**                            UNITS: MT              
  **5201**                                                                

  [Exports]{.smallcaps}     **MY 2001/2002**       **MY 2002/2003**       **MY 2003/2004**

  [to]{.smallcaps}:                                                       

  U.S.                      **3,360**              **537**                **1,741**

  [Other]{.smallcaps}                                                     

  [Japan]{.smallcaps}       [8,044]{.smallcaps}    7,276                  4,180

  [Guatemala]{.smallcaps}   [5,203]{.smallcaps}    1,856                  672

  [Total of                 [13,247]{.smallcaps}   9,132                  4,852
  other]{.smallcaps}                                                      

  [Others not               [2,709]{.smallcaps}    5,989                  5,367
  listed]{.smallcaps}                                                     

  **[Grand                  [19,316]{.smallcaps}   [15,658]{.smallcaps}   11,960
  total]{.smallcaps}**                                                    
  ------------------------- ---------------------- ---------------------- -----------------

**SOURCE**: World Trade Atlas, Mexico Edition, January 2004.

MY begin August ends July. Data as of January 2004

  ------------------------ ----------------------- ----------------------- -----------------
  **Cotton** **H.T.S.**                            UNITS: MT               
  5201                                                                     

  [Imports]{.smallcaps}    **MY 2001/2002**        **MY 2002/2003**        **MY 2003/2004**

  [From]{.smallcaps}:                                                      

  U.S.                     **442,777**             **503,594**             **150,111**

  [Other]{.smallcaps}                                                      

  [Cameroon]{.smallcaps}   [5,723]{.smallcaps}     [2,602]{.smallcaps}     0

  [Mali]{.smallcaps}       [1,064]{.smallcaps}     [1,748]{.smallcaps}     527

  [Total of                [6,787]{.smallcaps}     [4,350]{.smallcaps}     527
  other]{.smallcaps}                                                       

  [Others not              [101]{.smallcaps}       [2]{.smallcaps}         1
  listed]{.smallcaps}                                                      

  **[Grand                 [449,665]{.smallcaps}   [507,946]{.smallcaps}   150,639
  total]{.smallcaps}**                                                     
  ------------------------ ----------------------- ----------------------- -----------------

**SOURCE**: World Trade Atlas, Mexico Edition, January 2004.

MY begin August ends July. Data as of January 2004

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

  Exports to:             **CY 2002**       **CY 2003**       **CY 2004**

  **[United               **20,017,944**    **24,974.813**    **2,047.168**
  States]{.smallcaps}**                                       

  [Other]{.smallcaps}                                         

  [Canada]{.smallcaps}    864,865           533.399           54.803

  [Dominican              91                50.963            0
  Republic]{.smallcaps}                                       

  [France]{.smallcaps}    24,784            3                 0

  [Total                  889,740           584.365           54.803
  other]{.smallcaps}                                          

  [Other not              77,370            378.281           41.464
  listed]{.smallcaps}                                         

  **[Grand                **20,985,054**    **25,937.459**    **2,143.435**
  Total]{.smallcaps}**                                        
  ----------------------- ----------------- ----------------- -----------------

**SOURCE**: World Trade Atlas, Mexico Edition, February 2004.

Data as of January 2004.

+-----------------+-----------------+-----------------+-----------------+
| Cotton Yarn     |                 |                 |                 |
| H.T.S 5205,     |                 |                 |                 |
| 5206, 5207      |                 |                 |                 |
| UNITS: Kg       |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Imports from:   | **CY 2002**     | **CY 2003**     | **CY 2004**    |
+-----------------+-----------------+-----------------+-----------------+
| ###             | **23,513,149**  | **13,391.873**  | **964.078**     |
| # United States |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Oth            |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Taiw           | 1,166,603       | 1,236.322       | 29.902          |
| an]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Spa            | 1,076,235       | 970.874         | 157.474         |
| in]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Total          | 2,242,838       | 2,207.196       | 187.376         |
| oth             |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Other not      | 1,919,865       | 3,166.628       | 457.702         |
| list            |                 |                 |                 |
| ed]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **[Grand        | **27,675,852**  | **18,765.697**  | **1,609.156**   |
| Total           |                 |                 |                 |
| ]{.smallcaps}** |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

**SOURCE**: World Trade Atlas, Mexico Edition, February 2004.

Data as of January 2004.

+-----------------+-----------------+-----------------+-----------------+
| **Woven Cotton  |                 |                 |                 |
| Fabrics H.T.S.  |                 |                 |                 |
| 5208, 5209,     |                 |                 |                 |
| 5210, 5211,     |                 |                 |                 |
| 5212 UNITS: Kg  |                 |                 |                 |
| & M^2^**        |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Exports to:     | **CY 2002**     | **CY 2003**     | **CY 2004**    |
+-----------------+-----------------+-----------------+-----------------+
| ###             | **93,908,124**  | **46,217.080**  | **2,707.363**   |
| # United States |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Oth            |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Cana           | 4,518,907       | 2,703.852       | 111.542         |
| da]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [El             | 1,386,932       | 454.279         | 35.964          |
| Salvad          |                 |                 |                 |
| or]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Colomb         | 2,257,603       | 1,458.739       | 108.116         |
| ia]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Guatema        | 1,423,976       | 210.282         | 24.939          |
| la]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Total          | 9,587,418       | 4.827.152       | 280.561         |
| oth             |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Other not      | 23,499,253      | 2,899.736       | 202.938         |
| list            |                 |                 |                 |
| ed]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **[Grand        | **126,994,795** | **53,943.968**  | **3,190.862**   |
| Total           |                 |                 |                 |
| ]{.smallcaps}** |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

**SOURCE**: World Trade Atlas, Mexico Edition, February 2004.

Data as of January 2004.

**Note:** To comply with WTO directives regarding the harmonized tariff
system' homologation, official data for CY 2003 & CY 2004 is shown in
M^2^. Starting CY 2003 all Woven Cotton Fabrics' amounts are reported in
M^2^. For CY 2002 figures are in Kg.

+-----------------+-----------------+-----------------+-----------------+
| **Woven Cotton  |                 |                 |                 |
| Fabrics H.T.S.  |                 |                 |                 |
| 5208, 5209,     |                 |                 |                 |
| 5210, 5211,     |                 |                 |                 |
| 5212 UNITS:     |                 |                 |                 |
| M^2^**          |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Imports from:   | **CY 2002**     | **CY 2003**     | **CY 2004**    |
+-----------------+-----------------+-----------------+-----------------+
| ###             | **490,479,631** | **434,065.954** | **26,572.264**  |
| # United States |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Oth            |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [South          | 24,027,620      | 38,820.571      | 986.907         |
| Kor             |                 |                 |                 |
| ea]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Chi            | 59,369,719      | 66,880.913      | 4,456.960       |
| na]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Ind            | 35,119,009      | 17,891.328      | 2,051.817       |
| ia]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Total          | 118,516,348     | 123,592.812     | 11,495.684      |
| oth             |                 |                 |                 |
| er]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| [Other not      | 118,006,490     | 118,305.528     | 8,797.685       |
| list            |                 |                 |                 |
| ed]{.smallcaps} |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **[Grand        | **727,002,469** | **675,964.294** | **46,865.633**  |
| Total           |                 |                 |                 |
| ]{.smallcaps}** |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

**SOURCE**: World Trade Atlas, Mexico Edition, February 2004.

Data as of January 2004.

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

## PRODUCTION

MY 2004/05 cotton production is forecast at 625,000 bales (480 lb/bale),
a 75-percent increase from MY 2003/04 production, due to higher
international prices, increased planted area, and expectations of
increases in government supports. As a result, producers believe that
approximately 177,000 hectares will be planted in MY 2004/05, an
84-percent increase above the revised MY 2003/04 planted area figure of
63,763 ha. It should be noted that production and planted area for the
previous two years were atypically low due to unattractive international
prices. According to the CMCA, the target price could be increased to
approximately U.S. \$0.68 per pound of cotton lint during the MY
2004/05. In MY 2003/04, the target price for cotton was U.S. \$0.64 per
pound of cotton lint (see MX2173, MX3098 and MX3131). It should be noted
that growers insist that they would not be able to produce cotton
without this type of government support.

The increase in planted area is particularly true for producers in the
Juarez and Delicias areas, in the state of Chihuahua, where the forecast
for planted area has increased from 29,100 hectares in MY 2003/04 to
approximately 45,000 hectares for MY 2004/05. As a result, cotton
production in this area could reach nearly 241,000 bales. Also,
production in the Mexicali/San Luis area is expected to increase to
100,000 bales, up from 80,663 bales last year, due to increased acreage.
The CMCA pointed out that farmers in the La Laguna region (comprised of
the states of Coahuila and Durango) are going to plant approximately
18,000 hectares of transgenic cotton in April and May of 2004.
Preliminary planting figures in the south of Sonora estimate that
approximately 14,000 hectares will be planted, despite a water shortage
for crop irrigation. According to CMCA, cotton areas will be irrigated
by wells in southern Sonora. Also, the Sinaloa state government project
to improve the hydraulic infrastructure in the Yaqui and Mayo valleys
has also contributed to the increase in cotton planted area. However,
other areas, namely, in the north and south of the state of Tamaulipas,
cotton production is expected to be lower than initially forecast, due
to dry weather conditions.

According to official sources, approximately 25,000 hectares were
planted with BT cottonseed during the MY 2003/04, which helped offset
some production costs. Alcala and Delta Pine are the most popular seed
type used by cotton growers and only a small proportion of Pima variety
is planted in Juarez region. All seeds are imported from the United
States. According to CMCA, in the last few years' growers have used
fast-maturing seed varieties to compensate for dry weather conditions in
some areas such as in Sinaloa.

Production and harvested area estimates for MY 2002/03 and 2003/04 have
been revised upward in line with updated official information from
Mexico's Secretariat of Agriculture, Livestock, Rural Development,
Fisheries and Foodstuffs (SAGARPA) and the CMCA.

## PRODUCTION POLICY 

During MY 2003/04, cotton producers received government subsidies under
the terms of PROCAMPO (the governmental income support program for
farmers) as well as direct support through the "Target Income" program
(i.e., target price) (see Production section). For MY 2004/05 these
subsidies will continue. On March 1, 2004, SAGARPA announced it will pay
producers of cotton and other crops 935 pesos (USD \$85) per hectare
during the 2004/04 spring/summer and the 2004/05-fall/winter planting
seasons under the PROCAMPO domestic support program. This payment is 3.3
percent greater than what SAGARPA paid during the same period in
2003/04. The announcement also indicates that farmers with producing
areas of between one and five hectares will receive 1,120 pesos (USD
\$102) per hectare, or 8.7 percent more than SAGARPA paid last year.

Also, on July 14, 2003, SAGARPA announced specific guidelines
establishing the mechanisms to provide supports to producers of cotton
and other products (see MX3098 and MX3131). These supports are part of
the "Target Income" Program (see MX2173 and MX3067). These guidelines
are based on the general Operational Regulations (REGLAS) that SAGARPA
published for several support programs on June 17, 2003. According to
these Operational Regulations, the objective of the "Target Income"
program is to provide price certainty to farmers, increase their market
competitiveness and, consequently, their economic profitability. Other
objectives are to encourage farmer diversification and integration into
agricultural food chains, and regional development.

## YIELDS AND INPUTS

The yields around the country traditionally vary. The overall average
yield for the MY 2003/04 cotton crop, however, was 5.7 bales/ha, with
yields varying between 3.7 and 6.8 bales per hectare. Cotton yields for
MY 2004/05 are expected to reach 6.1 bales/ha, assuming normal weather
conditions and good water availability. Cotton production takes place
mostly in northwest Mexico, where crop irrigation is required.

Similarly, costs of production for cotton vary according to areas. In
Ciudad Obregon, Sonora, for example, costs are estimated at
approximately 14,000 pesos/ha (roughly US\$ 1,231/ha). While in the La
Laguna area costs are reportedly 19,000 pesos/ha. (US\$ 1,671) According
to the CMCA, average costs are estimated at 9,000 pesos/ha (US\$ 792
/ha). The CMCA also pointed out that, in general, production costs are
higher than those in the United States, despite the fact that an
increase in the use of BT cottonseed in some Mexican cotton-growing
areas has helped offset some production costs. According to industry
sources, Mexican cotton quality is generally poor and inconsistent.
Although there are approximately 150 gins, the majority of these are
outdated and damage the cotton during the ginning process. Textile firms
use the High Volume Instrument testing (HVI), but not the growers.
Consequently, only smaller mills use Mexican cotton, with products
designed toward the domestic market. While large mills generally consume
U.S. cotton in its production process, as U.S. cotton is considered to
be more consistent and of better quality.

## CONSUMPTION

For MY 2004/05, consumption is expected to increase slightly to 2.150
million bales over the current year. The increase in consumption is
attributed to the recovery in the Mexican economy and an increase
(albeit to a lesser extent) of textile exports to the U.S. The United
States continues to be the principal market for Mexico's textile
exports, accounting for 98.5 percent of total exports. Some industry
sources expect a slight increase in their exports to the United States,
mainly of denim jeans, due to the better performance of the U.S.
economy. The cotton consumption estimates for MY 2002/03 and 2003/04
have remained unchanged at 2.1 million bales.

Mexico's National Textile Industry Chamber (CANAITEX) pointed out that
two main factors are preventing a further expansion of cotton
consumption in MY 2004/05. First of all, Mexico has been losing market
share to China in the U.S. market in the last few years; and second,
domestic consumption continues to be adversely impacted by illegal
apparel/textile imports mainly from Asian countries.

Mexico's apparel and textile industry continues to be heavily dependent
on exports, with 66 percent of production exported and 41 percent used
domestically. According to the National Apparel Industry Chamber (CNIV),
however, these proportions have changed in the last few years due to the
strong competition from China in the U.S. market. In CY 2000, for
example, 71 percent of total textile and apparel production was
exported, while the rest was consumed domestically.

## TRADE 

Due to the increased domestic production, cotton imports are forecast to
increase just 1 percent in MY 2003/04 to 1.515 million bales. Again, the
United States is expected to continue being the main supplier. At the
same time, Mexican exports are forecast to remain unchanged in MY 2004.
Asian countries will continue to be the largest export markets for
Mexican cotton. The Mexican cotton import and export estimates have been
revised upward in MY 2002/03 and 2003/04, reflecting official data from
the Secretariat of Economy (SE) as well as updated industry information.

Under the North American Free Trade Agreement (NAFTA), Mexico's tariffs
on cotton imports were phased out on January 1, 2003. Also under NAFTA,
the rules of origin for cotton textiles products (such as fiber and yarn
forwarding provisions) ensure that only textiles from NAFTA countries
benefit from tariff reductions. The following cotton products are
subject to NAFTA rules of origin: a) Fiber-forward: cotton yarns; cotton
knit fabrics; b) Yarn-forward: most cotton woven fabrics; most
cotton/man-made blends; c) Fabric-forward: cotton luggage, handbags,
flat goods, cotton fabrics that are coated, laminated, or impregnated;
d) Single substantial transformation: men's shirts from certain
high-count cotton fabrics; men's shirts from certain cotton/man-made
blends; apparel from specific fabrics (corduroy, velveteen).

In FY 2003, Mexican cotton importers used US\$ 82.80 million of GSM‑102
credit against US\$ 69.4 million used in FY 2002. For FY 2004, GSM-102
is expected to continue to stimulate additional sales.

## STOCKS

Due to higher production and imports than previously estimated in MY
2002/03 and MY 2003/04, stocks have increased from our previous forecast
and estimate. Mexican mill owners have stated that an 8 to 10-week
supply of cotton is sufficient to ensure adequate stocks. Due to
continued tight credit and high interest rates, mill owners are
reluctant to hold stocks for long. For MY 2004/05, with total
consumption expected to increase to 1.515 million bales in MY 2004/05,
ending stocks are expected to decline approximately 135,000 bales to
563,000 bales. The decrease in carryover is expected to reduce the
stocks-to-use ratio from 32.8 to 25.9 percent.

## MARKETING

The challenge for U.S. exporters in Mexico in the near future is to
maintain their share of the Mexican textile market in the face of
increasing domestic production, a decline in the Mexican textile
industry, and potential challenges from third-country suppliers. The
U.S. industry should continue to increase Mexican consumers' awareness
of the advantages of cotton textile products. Cooperators should
continue promoting the consumption of natural fiber products over
synthetics. The United States has a distinct commercial advantage with
its close proximity to Mexico, which permits cotton purchases on an \"as
needed basis.\" Moreover, the availability of credit terms offered under
the GSM‑102 commercial credit guarantee program improves the standing of
U.S. cotton vis-à-vis other countries. U.S. cotton bales include fiber
classification labels called HVI as well. According to CANAITEX these
fiber-defining systems alleviate the millers's task by increasing
handling and processing efficiency.

## TEXTILE INDUSTRY

Total textile output fell 8.9 percent in CY 2003, the steepest decline
since the severe contraction in CY 2001. CANAITEX blamed the slump in
textile output --- now in its third consecutive year -- on growing
competition in the United States textile and apparel market from
lower-cost Asian and Caribbean countries as well as on the strong peso
against dollar since 2002 and part of 2003. Moreover, the domestic
textile sector continues to experience high levels of smuggling and
relatively high costs of production while simultaneously facing sluggish
demand from the apparel sector, which also has been adversely impacted
by the contraband. According to the CNIV approximately 60 percent of
apparel purchased in the Mexican market is contraband. CNIV estimates
total Mexico's apparel consumption at US\$ 16.3 billion, of which US\$
9.4 billion are illegal imports, US\$ 3.5 billion are official imports
(with origin certificate), and US\$ 3.4 are legally-produced products.
The negative output trend is expected to continue during CY 2004, albeit
at a slower pace than a year earlier, assuming that the U.S. economy
continues its recovery.

Following are figures showing the average output growth rates for the
Mexican textile industry:

  ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
  **Year**   **1991**   **1992**   **1993**   **1994**   **1995**   **1996**   **1997**   **1998**   **1999**   **2000**   **2001**   **2002**   **2003**

  **%**      3.7        ‑5         ‑7         1.1        -6.3       15.7       10.5       3.9        3.1        5.4        -8.6       -5.8       -8.9
  ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

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

As in production, CY 2003 textile exports decreased 8.3 percent compared
to 2002, whereas textile sales for the \"maquila\" industry (in-bond
industry), which are typically exported, decreased 10.4 percent for the
same period. According to the National Institute of Statistics and
Geography and Computer Science (INEGI), employment in the textile sector
decreased 9.5 percent in 2003, compared to 2002. As a result, CANAITEX
estimated a loss of approximately 132,000 jobs in 2003. Similarly, the
number of workers in the apparel industry decreased 11.5 percent from
514,000 in CY 2002 to 455,000 in CY 2003.

The textile industry primarily produces yarns and knitted and woven
fabrics, with denim fabric being a specialty. Traditionally, these
fabrics have been sold to domestic apparel manufacturers. The majority
of the textile firms are located in the central part of the country
(Puebla, Tlaxcala, Mexico and Guanajuato). Industry sources pointed out
that approximately 40 percent of the textile firms are family-owned,
employing fewer than five employees. Leading Mexican textile firms
exporting to the U.S. market includes Kaltex, S.A., Lear Mexican Trim,
and Eagle Trading Co.

As already noted, CANAITEX and CNIV complain that the smuggling of
illegal textile products continues to harm their industries, in spite of
efforts by the federal government. The contraband is mainly of Asian and
Chinese origin. As a result, both chambers have petitioned the Mexican
Ministries of Treasury (SHCP) and Economy (SE) to intensify measures to
control those practices.

Both industries recognize that they are becoming less competitive in
several aspects. However, they are counteracting this by cutting costs
as well as shifting production from low-value-added basic garments to
more value-added garments and complete services. Industry sources are
optimistic that if they are able to differentiate their products and
move more into U.S. niche markets, production levels could be maintained
and Mexico could continue to be a major supplier of textiles and apparel
to the United States. Another factor, which could stimulate the Mexican
textile sector, is the U.S.-Central American Free Trade Agreement
(CAFTA). This agreement includes an accumulation clause, which would
allow the Mexican textile industry to export fabrics to Central American
countries to produce garments, then export these garments to the United
States and still retain preferential access. CANAITEX pointed out it
could increase Mexican textile exports.

At the same time there is growing concern in the apparel and textiles
industries about the effects the 2005 elimination of the Multi-Fiber
Agreement (MFA) will have. This agreement allows an importing signatory
country to apply quantitative restrictions (quotas) on textile imports
when it considers them necessary to prevent market disruption. The
objective of the MFA was to reconcile the interests of textile-exporting
and textile-importing countries by permitting an orderly expansion of
trade while avoiding market disruption. But the global system of
bilateral textile and apparel quotas that comprise the MFA is scheduled
to end on July 1, 2005. The Mexican apparel and textile industries are
concerned that the overall output of both industries could decline
further once the MFA quotas are removed as China would continue to
increase its market share in the U.S. apparel and textile markets.
Consequently textile and apparel industries have been lobbying the
Mexican government to enact measures, which would allow them to be more
competitive. For example, the textile industry is requesting an
exemption of the 2-percent tax on assets for those companies that invest
in their plants during next two years; this tax has to be paid on assets
(i.e., equipment) whether or not it is being used. Another request is
for a reduction on electricity tariffs, which the textile industry
claims are extremely high. Also, the Mexican textile industry will
request that the SE continue compensatory quotas on Chinese garments and
textile products. Despite the fact that China joined the WTO at the end
of 2001, Mexico made a bilateral deal to keep high tariffs
(approximately 500 percent) on certain Chinese products for another six
years.