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Monthly Economic Letter

Cotton Market Fundamentals & Price Outlook

October 2016


Prices outside of China increased and decreased over the past month.  Chinese prices rose.

  • Prices for the December NY futures contract increased from values below 67 cents/lb in mid-September to those near 72 cents/lb later in the month. More recently, prices fell back to values near 67 cents.
  • The A Index rose from 75 cents/lb in mid-September to values near 81 cents/lb a couple weeks later. Since then, levels have dropped to values near 77 cents/lb.
  • The China Cotton (CC 3128B) Index increased steadily over the past months, rising from 96 cents/lb to 104 cents/lb (or from 14,100 to 15,300 RMB/ton).
  • Prices for the Indian Shankar-6 variety followed the same general pattern as NY futures and the A Index, rising from 83 cents/lb a month ago to values near 92 cents/lb in late September before retreating back to 85 cents/lb recently. In local terms, movement was from 43,000 to 48,000 and then to 44,500 INR/candy.
  • Pakistani spot prices also rose and fell, with values climbing from 68 to 72 cents/lb and then easing back to levels below 70 cents/lb (from 5,850 to 6,250 and then to 6,000 PKR/maund).


This month's USDA report featured increases to both world production and mill-use. The increase to the global harvest number was marginal (+222,000 bales), but lifted the projection from 102.5 to 102.7 million. The revision for mill-use was more significant (+797,000 bales), with the global figure rising from 111.2 to 112.0 million.

Driving much of the increase in global consumption were changes to Chinese estimates. Chinese consumption figures were increased not only for the current 2016/17 crop year (+500,000 bales), but also for the two previous years (+1.0 million bales for both 2014/15 and 2015/16). When historical revisions are made, there is a cumulative effect on stocks and these changes to Chinese mill-use were a primary reason why the forecast for 2016/17 ending stocks dropped 2.5 million bales (from 89.8 to 87.3 million). This remains an extraordinarily high level relative to anything the market had seen prior to the vast accumulation of Chinese reserves in the wake of the 2010/11 spike, but it is an indication that the de-stocking process should conclude sooner than previously thought.

At the country-level, the largest changes to harvest expectations were for Australia (+500,000 bales to 4.0 million), Mali (+125,000, to 1.2 million), the U.S. (-108,000, to 16.0 million), and Brazil (-150,000 bales, to 6.5 million). For mill-use, the biggest changes outside of those for China were for Bangladesh (+400,000 bales, to 6.4 million), Indonesia (+100,000, to 2.9 million), and Uzbekistan (+100,000, to 1.5 million).

Global trade forecasts were lifted 1.0 million bales. On the export side, forecasts were increased for Australia (+800,000 bales, to 3.9 million), the U.S. (+500,000 bales, to 12.0 million), Uzbekistan (+300,000 bales, to 2.2 million), and Mali (+100,000 bales, to 1.2 million) while the export figure for Brazil was lowered (-500,000 bales, to 2.9 million). On the import side, projections were increased for India (+500,000 bales, to 1.5 million), Bangladesh (+400,000, to 6.3 million), and Indonesia (+100,000 bales, to 2.9 million). There were no significant downward revisions to import estimates.


The divergence between Chinese prices and prices outside China over the past month demonstrate the separation between markets. The most recent increases in Chinese prices accompanied the conclusion of sales from the reserve system. Harvesting has begun in China, and as the volume of cotton picked and ginned starts to accumulate, some of the upward pressure may abate.

The Chinese crop is small by historic standards, with only 21.0 million bales expected to be collected (the ten-year average between 2005/06 and 2014/15 is 33.2). However, with reserve sales scheduled to recommence in March, the domestic crop will only be crucial during the five month period between October and February, when no cotton reserve cotton will be sold. Assuming stability in monthly consumption, five months of China's 35.0 million bale mill-use forecast suggest that 14.6 million bales are needed during this time period. Since the harvest easily exceeds this amount, it could be expected that supply-related price pressure will ease as more of the crop is collected and made available to mills.

Outside China, the most acute tightness in supply this summer was experienced on the Indian sub-continent. In Pakistan, yields are expected to be much better this season, and 1.3 million more bales of cotton should be collected (from 7.0 million to 8.3 million). India is also expected to enjoy solid yields that is expected to offset a decline in acreage (2016/17 crop forecast to be +100,000 bales larger than last year and reach 26.5 million). There has been a pullback in Chinese demand for yarn imports from both of these countries, with shipments down more than 30% from both locations so far this calendar year (January-August). With Indian and Pakistani mill-use flat to lower, there should be stability, if not slight increases, in Indian and Pakistani stocks this crop year.

Beyond India and Pakistan, a significant increase in production is expected. Altogether, this collection of countries is expected to grow 6.1 million more bales than last year (+18%). Much of the increase is forecast to come from major exporters, with the U.S. expected to collect 24% more than a year ago (+3.1 million bales, to 16.0 million), West Africa expected to grow 16% more (+0.6 million bales, to 4.6 million), and Australia expected to produce 54% more (+1.4 million bales, to 4.0 million). The increase in available supply resulting from the larger harvest among exporting countries has been a major reason why downward pressure has been expected to develop outside of China this fall. In China, the price situation is more complicated, but as more of their harvest is gathered and made available for shipment there, prices could ease in China as well.

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