Cotton prices experienced volatility over the past month. After following a downward trend in the second half of May, New York futures rebounded rather sharply in June. From prices near 85 cents/lb, values for the July contract fell below 80 cents/lb before bouncing back to levels close to 90 cents/lb. The most-actively traded December contract followed a similar pattern, declining from a level near 85 cents/lb to less than 82 cents/lb before climbing to values around 88 cents/lb. A Index prices dropped from levels around 93 cents/lb to those under 89 cents/lb and then bounced back to 93 cents/lb. Chinese prices (CC Index 328) have been stable near 143 cents/lb. Indian (Shankar-6 variety) and Pakistani spot prices have also been steady, respectively holding to values between 85-88 cents/lb and 78-81 cents/lb.
The latest USDA report included few changes in global supply and demand figures, but described important shifts in trade expectations. The global production figure for 2013/14 was revised 657,000 bales lower, from 117.8 million bales to 117.2 million. The largest country-level revision for the 2013/14 crop was for the U.S., where persistent drought conditions in Texas pulled harvest expectations 500,000 bales lower, from 14.0 million to 13.5 million. The global consumption figure for 2013/14 declined 258,000 bales, from 110.4 million bales to 110.2 million. The largest country-level revisions in mill-use were for India (-250,000), Bangladesh (-100,000), and Vietnam (+100,000). The relatively small changes to production and consumption figures resulted in a marginal revision to the estimate for global ending stocks (-254,000 bales, from 92.7 million to 92.5 million).
Revisions to trade estimates indicate that more cotton will be shipped in 2012/13 than previously estimated (+1.7 million bales, from 45.2 million to 46.9 million) and less cotton will be shipped in 2013/14 than previously estimated (-1.1 million bales, from 39.5 million to 38.4 million). Driving the revisions to trade figures were changes to expectations regarding Chinese import demand, with the 2012/13 figure revised 1.8 million bales higher (from 18.3 million to 20.0 million) and the 2013/14 revised 1.0 million bales lower (from 12.0 million to 11.0 million). In terms of exports, Australia (+500,000 bales), the U.S. (+350,000), India (+200,000), and Turkmenistan (+150,000) are all expected to ship more cotton in 2012/13 than previously estimated. Projections for 2013/14 deliveries declined for Australia (-500,000 bales), the U.S. (-500,000), and Brazil (-200,000), but were increased for India (+200,000).
These revisions to trade figures highlight a principal uncertainty that has been facing the cotton market for the past couple years. With a large proportion of recent Chinese harvests flowing into the government's reserve system, a major question facing markets has been how will the Chinese government choose to supply mills – through releases from reserves or through imports. If more cotton is pushed out of reserves, it would mean lower imports, higher ending stocks in exporting countries, and downward pressure on world cotton prices. If less cotton is moved out of reserves and more imports are permitted, the implication is lower ending stocks in exporting countries and upward pressure on prices. The revisions in this month's report suggest that existing expectations regarding imports were too low and that stocks in exporting countries will be pulled tighter in 2012/13 than previously estimated. This is a likely reason why New York futures prices moved higher with the release of the current USDA report.
Following this month's reduction in the Chinese import forecast for 2013/14, the USDA is forecasting a 18.1% decline in global trade in the upcoming crop year (-8.5 million bales, from 46.9 million in 2012/13 to 38.4 million bales in 2013/14). Even with the projected reduction in trade volumes, ending stocks in countries outside of China are expected to decrease slightly in the coming crop year (-1.2 million bales, from 34.9 million to 33.6 million). Last crop year, early USDA estimates for 2012/13 proved to be too low. The forecast made in June 2012 was 13.5 million, 6.5 million bales below the current figure. If the current forecast for 2013/14 Chinese imports also proves to be too low, there would be upward pressure on world cotton prices as stocks draw tighter in countries outside China.
At the center of the uncertainty surrounding Chinese import volumes are Chinese cotton policies that maintain high prices for Chinese growers and mills while concentrating global supplies in China. At a recent conference, ranking officials from the National Development and Reform Commission (NDRC), the organization charged with managing cotton policy, and the Chinese Cotton Association (CCA) indicated that reform efforts were underway and that new cotton policies could be instituted in the 2014/15 crop year. In the meantime, the same general policies that were in place during the 2012/13 crop are to be extended into 2013/14. Therefore, global price direction could be expected to continue to be heavily influenced by Chinese import demand for the next several months.