Explanation of Revisions to the China Cotton Balance Sheet - May 2005 WASDE: This month’s supply and demand estimates for China include a negative residual in the “loss” column for 1994/95 through 2005/06. This residual signals the likelihood that stocks in China are larger than the level indicated by USDA’s estimates of supply less demand, due to an unexplained discrepancy in the underlying data. The balance sheets for the United States, Australia, and Brazil have similar residuals in some years. The government of China does not provide an official cotton balance sheet. USDA estimates China’s supply and demand using China government statistics, to the maximum extent possible. For the period 1994/95 through 2004/05, USDA’s China production estimate is the final official estimate released by the China National Bureau of Statistics (NBS). USDA’s estimates of China’s domestic consumption are based on the NBS yarn production data, adjusted to derive total use of raw cotton fiber. USDA adopts China customs data for cotton imports and exports. The May 2005 estimates include revisions in imports for several past years as reported in the Global Trade Information System. China’s economy and cotton sector have undergone significant changes since the mid-1990’s. These changes include the elimination of the floor under government procurement prices, the participation of non-government entities in cotton trade, the accumulation and subsequent disposal of large surpluses. During this period USDA has made historical revisions raising China’s ending stocks three times--April 2000, July 2002, and November 2004. These revisions were based on evidence of prior crop surpluses from sales of the government reserve and other relevant information from Chinese sources. Notwithstanding the earlier historical revisions, there appears to be a persistent error in the supply-demand balance sheet which tends to understate ending stocks. China’s stocks have tightened substantially in recent years as surpluses were sold and the government stopped carrying large reserves. In addition, factors such as rapidly rising consumption, restrictions on government credit, and a more flexible import quota system have encouraged China’s mills to limit the stocks they carry and cover their requirements on a hand-to-mouth basis. Nevertheless, it is unlikely that total stocks in China – including stocks at mills and stocks in the “pipeline” (held by suppliers, at ports, in transit, etc.) has fallen below two months’ domestic mill use. Since the current pace of China’s 2004/05 imports will not sustain stocks at this minimum level, USDA has elected to add a modest residual to the balance sheet rather than derive a stocks estimate deemed to be too low. And because it is unlikely that the data inconsistency is a one-year phenomenon, the residuals are included beginning in 1994/95 and increased roughly proportional to the subsequent growth of China’s cotton industry, culminating in 350,000-bale adjustments in both 2004/05 and 2005/06—these recent adjustments are less than 1 percent of estimated domestic consumption. USDA will continue to investigate both data sources and methods to improve the estimation of the China cotton balance sheet, and may make further revisions at a later date. Interagency Cotton Estimates Committee/5-12-05 Revised China S&D - May 2005 WASDE: 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 April 2005 Estimates: Area 5,530 5,422 4,722 4,491 4,459 3,726 4,058 4,820 4,184 5,110 5,690 Beginning Stocks 6,551 10,328 15,852 18,805 22,555 24,233 18,958 15,551 13,808 8,884 7,843 Production 19,900 21,900 19,300 21,100 20,700 17,600 20,300 24,400 22,600 22,300 29,000 Imports 4,060 3,045 3,613 1,834 359 117 241 449 3,127 8,832 8,000 Total Supply 30,511 35,273 38,765 41,739 43,614 41,950 39,499 40,400 39,535 40,016 44,843 Consumption 20,000 19,400 19,950 19,150 18,700 21,300 23,500 26,250 29,900 32,000 37,500 Exports 183 21 10 34 681 1,692 448 342 751 173 50 Loss 0 0 0 0 0 0 0 0 0 0 0 Ending Stocks 10,328 15,852 18,805 22,555 24,233 18,958 15,551 13,808 8,884 7,843 7,293 Stocks/use % 51.2% 81.6% 94.2% 117.6% 125.0% 82.5% 64.9% 51.9% 29.0% 24.4% 19.4% May 2005 Estimates: Area 5,530 5,422 4,722 4,491 4,459 3,726 4,058 4,820 4,184 5,110 5,690 4,800 Beginning Stocks 6,551 10,528 16,116 19,147 22,997 24,853 19,778 16,566 15,073 10,399 9,608 8,933 Production 19,900 21,900 19,300 21,100 20,700 17,600 20,300 24,400 22,600 22,300 29,000 25,500 Imports 4,060 2,908 3,491 1,725 332 117 230 449 3,127 8,832 8,000 15,000 Total Supply 30,511 35,336 38,907 41,972 44,029 42,570 40,308 41,415 40,800 41,531 46,608 49,433 Consumption 20,000 19,400 19,950 19,150 18,700 21,300 23,500 26,250 29,900 32,000 38,000 41,000 Exports 183 20 10 25 676 1,692 442 342 751 173 25 25 Loss -200 -200 -200 -200 -200 -200 -200 -250 -250 -250 -350 -350 Ending Stocks 10,528 16,116 19,147 22,997 24,853 19,778 16,566 15,073 10,399 9,608 8,933 8,758 Stocks/use % 52.2% 83.0% 95.9% 119.9% 128.3% 86.0% 69.2% 56.7% 33.9% 29.9% 23.5% 21.3% Change In: Beginning Stocks 0 200 264 342 442 620 820 1,015 1,265 1,515 1,765 Imports 0 -137 -122 -109 -27 0 -11 0 0 0 0 Consumption 0 0 0 0 0 0 0 0 0 0 500 Exports 0 -1 0 -9 -5 0 -6 0 0 0 -25 Loss -200 -200 -200 -200 -200 -200 -200 -250 -250 -250 -350 Ending Stocks 200 264 342 442 620 820 1,015 1,265 1,515 1,765 1,640 Interagency Commodity Estimates Committee: 5/12/05