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Monthly Economic Letter

Cotton Market Fundamentals & Price Outlook

September 2016

RECENT PRICE MOVEMENT

All of the world's major benchmark prices moved lower last month.

  • Prices for the December NY futures contract dropped from 73 cents/lb in early August to below 67 cents/lb in the latest trading.
  • Movement in the A Index mirrored those in NY futures, with values dropping from 85 cents/lb in early August to those near 78 cents/lb in early September.
  • The China Cotton (CC 3128B) Index declined throughout August, falling from values equivalent to 101 cents/lb (14,900 RMB/ton) to those near 96 cents/lb (14,100 RMB/ton). In September, the CC Index has been stable, holding to levels near 96 cents/lb or 14,100 RMB/ton.
  • Prices for the Indian Shankar-6 variety decreased 23 out of the last 24 trading days. After peaking around 92 cents/lb in mid-July, Indian spot prices were near 82 cents/lb most recently. In local terms, the decline was from 47,800 to 43,000 INR/candy.
  • Pakistani spot prices decreased from 79 to 68 cents/lb, or from 6,800 to 5,850 PKR/maund.

SUPPLY, DEMAND, & TRADE

This month's USDA report featured an increased to world production (+888,000 bales, from 101.6 to 102.5 million) and virtually no change to world mill-use (-35,000 bales, from 111.3 to 111.2 million). There was a decrease in the amount of cotton estimated to have been carried forward from last season, with 2016/17 beginning stocks dropping 626,000 bales (from 99.2 to 98.5 million). This offset most of the effect of a larger crop on the projection for 2016/17 ending stocks, with the forecast for global ending stocks rising only 197,000 bales relative to last month's estimate (from 89.6 to 89.8 million).

Among the countries with additions to harvest forecasts were Australia (+700,000 bales, to 3.5 million), the U.S. (+263,000, to 16.1 million), Pakistan (+250,000, to 8.3 million), Turkey (+200,000, to 3.2 million), Burkina Faso (+100,000, to 1.3 million), and Mali (+100,000, to 1.1 million). The Indian production estimate dropped by 500,000 bales (to 26.5 million), and there were smaller decreases for Tanzania (-120,000 bales, to 200,000) and Zimbabwe (-100,000, to 150,000). For mill-use, there were few significant country-level changes. The largest updates included the 150,000 bale increase for Turkey (to 6.8 million) and the 100,000 bale decrease for the U.S. (to 3.5 million).

The global trade estimate was reduced 150,000 bales, from 34.0 to 33.9 million. The only noteworthy country-level change to import figures was for Turkey (-100,000 bales, to 3.7 million). For exports, there were increases for Australia (+300,000 bales, to 3.1 million) and Mali (+100,000 bales, to 1.1 million) as well as decreases for India (-300,000 bales, to 3.9 million) and Brazil (-200,000, to 3.4 million).

PRICE OUTLOOK

After the increases in July, cotton prices around the world turned lower in August. As was the case when prices were increasing, there were different developments in different markets that helped pull prices lower.

In the U.S., prices turned lower after rainfall arrived in early August. Following a spring characterized by adequate soil moisture and generally good growing conditions, hot and dry conditions dominated over the summer and put stress on plants. This led to concerns about yield in non-irrigated regions and fed into the strength of prices in July. In early August, a series of rainstorms moved through West Texas and the Southeast. These storms were accompanied by lower temperatures, and as crop condition ratings improved, prices decreased.

There were also concerns about India's weather this summer. India gets about 85% of its annual rainfall from the monsoon that comes between June and September. This year, the monsoon was late, especially in the most important growing region of Gujarat. Due to challenging growing conditions last year, a reduction in Indian acreage had been long predicted, but the delay in the monsoon motivated worries that more acreage may shift out of cotton. As rainfall moved into important growing areas in August, planting accelerated and the decline in acreage currently predicted (-8% year-over-year) is less than was feared in July.

In China, prices moved lower on news that the Chinese government would be extending auctions of reserve supplies for an additional month. This action was important not only because of the physical release of additional supply, but also because it was a signal indicating that Chinese officials are willing to take steps to maintain price stability.

Looking forward, the price outlook is built around varying levels of certainty for each of these major cotton countries. The situation for the U.S. may be the most clear, as it is apparent that there will be an important increase in U.S. stocks this crop year (+30% or +1.1 million bales). This large increase is predicted even with what could be considered an optimistic export number, which assumes that 70% of the increase in U.S. production will find a buyer overseas. If U.S. exports do not reach the level of growth forecast, the increase in U.S. stocks will be even larger than currently predicted. Since this U.S. is the world's largest exporter, this could put downward pressure on prices globally.

A factor that may help U.S. exports is that India, the world's second largest exporter, will not have a lot of cotton to sell. At only 2.5 million bales, India's production surplus in 2016/17 will be only marginally higher than last year and will be less than half the average between 2012/13 and 2014/15. India's exports are projected to be lower, due in part to the expected success of the Pakistani harvest. Nonetheless, Indian stocks are forecast to decrease slightly this crop year, and tightness in Indian stocks could provide support to prices if export demand surfaces.

With the Chinese market mostly closed off from the rest of the world due to import quotas, Chinese price direction should be shaped by domestic developments. A significant source of uncertainty is the timing of the domestic harvest relative to auctions from reserves. There is sufficient cotton in storage to easily make up for this year's 13.5 million bale production deficit. However, the timing and logistics associated with getting the harvest and/or auctioned supplies to mills when they need it could induce scarcity and therefore volatility if not well coordinated.

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