RECENT PRICE MOVEMENT
After easing slightly in December, many benchmark cotton prices ticked higher in early January. Chinese prices declined marginally over the past month.
SUPPLY, DEMAND, & TRADE
This month's USDA report featured an increase in world cotton production, with the global figure rising 1.1 million bales to 105.3 million. The largest changes to country-level estimates were for China (+1.0 million bales, to 22.0 million), the U.S. (+435,000 bales, to 17.0 million), and Pakistan (-350,000, to 7.9 million).
The global mill-use figure was virtually unchanged (-155,000 bales, to 111.8 million). Nonetheless, there were several notable revisions at the country-level, including those for China (+500,000, to 36.3 million), Bangladesh (+100,000 bales, to 6.5 million), Turkey (-100,000, to 6.7 million), Mexico (-125,000, to 1.7 million), and India (-500,000, to 23.3 million).
Trade forecasts were increased slightly, with the figure for global imports rising 345,000 bales to 35.6 million. This was primarily a result of higher expectations for Pakistan (+350,000 bales, to 2.6 million) and Bangladesh (+150,000 bales, to 6.5 million) more than outweighing reductions for Mexico (-125,000 bales, to 1.2 million). In terms of exports, forecasts were lifted for the U.S. (+300,000 bales, to 12.5 million) and India (+200,000, to 4.4 million), which more than offset lower projections for Australia (-100,000, to 4.0 million) and Uzbekistan (-150,000, to 2.0 million).
A larger harvest number, combined with a stable use estimate, imply an increase in ending stocks and the projection for global ending stocks was lifted 1.5 million bales to 90.6 million. Although some of the increase in stocks is expected to occur in China (+500,000 bales, to 48.3 million), the majority of the addition is projected to end up in warehouses in exporting countries, including India (+300,000, to 12.1 million), Australia (+250,000, to 2.3 million), the U.S. (+200,000 bales, to 5.0 million), and Uzbekistan (+150,000 bales, to 1.1 million).
At some point, the increase in exportable supply could be expected to weigh on prices. There was tightening in stocks outside China this summer, due in large part to the difficulties associated with the 2015/16 Pakistani and Indian harvests. At the end of the current 2016/17 crop year, stocks outside of China are expected to be about 10% higher than they were at the end of 2015/16. Even with that growth, the level of 2016/17 ending stocks is projected to be lower than it was in 2014/15 (42.3 million bales in 2016/17 versus 44.8 million in 2014/15). However, the stocks-to-use ratio for the world-less-China in 2016/17 is expected to be slightly higher than it was in 2014/15 (52.9% in 2016/17 versus 52.3% in 2014/15) due to lower Chinese import demand (China imported 8.3 million bales in 2014/15 and is forecast to import only 4.5 million bales in 2016/17). In 2014/15, the A Index averaged 71 cents/lb. Thus far into 2016/17, the A Index has averaged 79 cents/lb.
Given the recent strength of cotton prices relative to prices for other crops, notably corn, planted cotton acreage can be expected to expand in 2017/18. A recent survey by a U.S. trade publication suggested that U.S. cotton acreage could increase around 10% next crop year. The National Cotton Council will release results from its comprehensive survey of U.S. growers at its annual meeting February 11th. Increases in acreage could also be expected in other major producing countries. An initial set of forecasts for global production, use, and trade will be released by the USDA at its outlook meeting February 24th. Global acreage and production can be expected to rise, while world mill-use can be expected to be stable. This suggests another increase in stocks outside of China in 2017/18, which could put additional downward pressure on prices.
However, prices have proven resilient to fundamental forces in recent months. This may be due in part to speculative activity. A possible motivation for speculator interest in cotton futures is the large volume of what is known as "unfixed on-call sales." Briefly, unfixed on-call sales represent short positions held by merchants for hedging purposes. As the prices are fixed, meaning that a merchant's deal with a mill is finalized, the merchant exits their hedging (short) position. This implies that the merchant buys an offsetting futures contract. Since there are a lot of unfixed on-call sales (up 80% relative to the level one year ago), there will be a lot of merchant buying whenever mills decide to fix their contracts. When this buying happens, there can be upward movement in prices, and that possibility may be what has attracted speculators to cotton futures. In the longer run, fundamentals tend to drive price direction, but the high level of unfixed on-call sales could lend some support to prices over the next few months.