Cotton prices rallied sharply over the past month.  Starting February 8, the May contract climbed from 69.00 cents/lb to a high of 84.60 cents/lb on March 1.  In more recent trading, prices retreated about 4 cents/lb, testing support just below 80 cents/lb before slightly rebounding to close at 80.21 cents/lb on March 10.  The rise in NY futures was closely followed by the A Index, which rose from 74.90 cents/lb on February 8 to 87.05 cents/lb on March 2 before falling back to 84.80 cents/lb on March 10.  The onset of the rally nearly coincided with the release of last month’s bullish USDA report (February 9), which featured the first significant increase in consumption estimates since the beginning of the crop year.  This month’s report, which includes a 675,000 bale reduction in ending stocks, can also be considered supportive of prices.  Contributing to this month’s decline in ending stocks were both a 500,000 bale reduction to the world production figure and a 170,000 bale increase to the world consumption projection. 

At 102.2 million bales, the current world production estimate represents a 5.0% decline compared to 2008/09 and a 14.7% decline compared to 2007/08.  Much of this year’s decline in production is a result of lower Chinese acreage and production.  Falling another 500,000 bales in the March, the current Chinese production figure (31.5 million bales) is 5.2 million bales lower than in 2008/09 (36.7 million) and 5.5 million bales lower than the record high of 37.0 million bales in 2007/08.  Other countries with significant revisions to 2009/10 production estimates were Uzbekistan (-300,000 bales), Brazil (+200,000 bales), and Turkmenistan (+100,000).

With the 170,000 bale increase, 2009/10 world consumption is now estimated at 115.7 million bales, which is 5.6 million bales more than in 2008/09 and 7.3 million bales less than in 2007/08.  Countries with significant revisions to 2009/10 figures include Pakistan (-250,000 bales), Turkey (+200,000), the U.S. (+100,000), and Vietnam (+100,000).  China’s consumption estimate was unchanged, and the decrease in China’s production figure was offset by a 500,000 bale increase in projected Chinese imports.  Import estimates for Turkey (+200,000 bales) and Vietnam (+150,000) also increased, while the import figure for Pakistan decreased (-250,000).  Export estimates rose for India (+400,000 bales), Pakistan (+200,000), and Australia (+100,000), while the Uzbek export estimate fell 100,000 bales.

This month’s reduction in world ending stocks resulted in another decrease in the world stocks-to-use ratio.  Falling 0.6 percentage points to 44.4%, the March estimate is the lowest since the 1994/95 season and is a likely reason why cotton prices have reached their highest levels in two years.  These higher cotton prices are expected to result in increased cotton acreage and production in 2010/11.  Preliminary figures for 2010/11 released February 19 in the USDA’s Cotton Outlook report forecast a 10.5% increase in world cotton production in the upcoming crop year.  With world consumption expected to grow 2.6% in 2010/11, however, the increase in production is not expected to be sufficient to completely overcome the production/consumption gap.  As a result, the stocks-to-use ratio is predicted to fall 2.6 percentage points to 41.8%, which could support prices throughout 2010/11.  In spite of the forecast for further tightening in 2010/11, futures prices suggest a reduction in price pressure in 2010/11, as 2010/11 contracts have been consistently trading several cents/lb lower than 2009/10 contracts.  The contradiction between preliminary estimates for fundamentals and futures prices emphasizes the uncertainty facing cotton markets in 2010/11 from this early standpoint.  As additional information becomes available to address questions regarding acreage, production, and consumption for 2010/11, fundamental pressure on prices should continue to be a dominant factor throughout the remainder of the 2009/10 crop year.