Monthly Economic Letter
Cotton Market Fundamentals & Price Outlook
RECENT PRICE MOVEMENT
Cotton benchmarks moved higher and then lower over the past month. Current values for most prices are near those posted one month ago.
- The NY/ICE December contract has been testing the upper end of the range that has contained values since November 2022. Over the past month, values briefly climbed above 90 cents/lb level (on September 1st) but retreated in more recent trading. The latest values are near the level one month ago.
- Around the time NY/ICE futures touched values over 90 cents/lb, the A Index climbed over one dollar for the first time since February. More recently, the A Index has been 96 cents/lb.
- Chinese prices (China Cotton Index or CC 3128B) traded between 111 and 115 cents/lb over the past month. In domestic terms, values were generally between 18,000 and 18,500 RMB/ton. The RMB was mostly stable against the dollar, holding near 7.30 RMB/USD.
- Indian spot prices (Shankar-6 quality) traded between 92 and 96 cents/lb. In domestic terms, prices were between 60,000 and 62,500 INR/candy. The INR was steady against the dollar over the past month, near 83 INR/USD.
- Pakistani prices increased in the second half of August and into September, rising from 75 to 83 cents/lb. More recently, prices moved lower, with current values near 75 cents/lb. In domestic terms, prices ranged between 18,000 to 20,800 PKR/maund. The PKR weakened against the dollar, from less than 290 PKR/USD in early August to more than 300 PKR/USD recently.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured reductions to global production (-1.7 million bales to 112.4 million) and mill-use (-1.1 million bales to 115.9 million). Historical revisions, primarily those that lifted mill-use figures for China and Turkey across several recent crop years, resulted in a -1.0 million reduction in 2023/24 beginning stocks (to 93.2 million).
The net effect of the changes to production, use, and beginning stocks on 2023/24 ending stocks was a -1.6 million bale reduction (to 90.0 million). While lower than last month, this volume ranks among the top seven all-time, only behind the levels from last crop year, 2019/20 (affected by COVID), and the period of elevated Chinese reserves (2012/13 to 2015/16).
At the country-level, the largest updates for 2023/24 production included those for the U.S. (-860,000 bales to 13.1 million), India (-500,000 bales to 25.0 million), Greece (-230,000 to 1.1 million), Benin (-225,000 to 1.2 million), Burkina Faso (-225,000 to 0.7 million), Mexico (-175,000 to 1.1 million), and Egypt (-105,000 to 0.4 million). These reductions were partially offset by a higher forecast for Brazil (+550,000 bales to 13.8 million).
For 2023/24 mill-use, the largest changes were for Bangladesh (-300,000 to 7.7 million), India (-500,000 to 24.0 million), Mexico (-150,000 to 1.8 million), and Vietnam (-100,000 to 6.9 million). There were no additions to 2023/24 consumption estimates over 100,000 bales.
The global trade forecast was lowered -610,000 bales to 43.3 million. In terms of imports, the largest changes included those for Bangladesh (-300,000 to 7.7 million), India (-200,000 to 1.3 million), and Vietnam (-100,000 bales to 6.9 million). In terms of exports, the largest changes included those for Brazil (+550,000 to 11.8 million), India (-200,000 to 2.0 million), the U.S. (-200,000 to 12.3 million), Burkina Faso (-175,000 to 0.7 million), Greece (-175,000 to 1.1 million), Benin (-125,000 to 1.1 million), Australia (-100,000 to 5.8 million), and Mexico (-100,000 to 0.3 million).
Weather-related concerns have coincided with upward movement in NY/ICE futures in recent months. After heavy rains around the planting period, conditions in West Texas became extremely hot and dry in July and August. This pulled recent USDA crop condition ratings for Texas below levels from one year ago, when abandonment rates in the state reached record highs.
Another factor weighing on the U.S. production number was a downward revision to the planted acreage estimate. New information becomes available to the USDA in late August, and that has been a factor leading to revisions to U.S. production estimates in September in recent years. Last crop year, the USDA lifted the U.S. planted acreage estimate +1.3 million acres (+10%, from 12.5 in August to 13.8 million acres in September). This crop year, the reduction was -860,000 acres (-8%, from 11.1 million acres in August to 10.2 in September). As was the case last year, the USDA did not change its assumptions about the national abandonment rate month-over-month between August and September (the estimated rate for 2023/24 held at 22%, for comparison, the final figure for 2022/23 was 47%). With the abandonment rate unchanged, the reduction in planted acres pulled the forecast for harvested acreage lower (from 8.6 to 8.2 million acres).
Lower planted acreage and the weather are among the factors pulling production forecasts lower around the world. After a promising start, the Indian monsoon stalled, and concerns about drought have lowered harvest estimates. In Greece, there has been flooding. While in West Africa, political unrest has made the delivery of inputs a challenge in certain locations. These events compound the effect of lower cotton prices and reduced cotton acres. Pakistan stands out as the only major cotton-producing country expected to grow more fiber year-over-year (+2.6 million bales to 6.5 million after recovery from last crop year’s flooding and generally favorable growing conditions for 2023/24).
It remains to be seen how lower global production expectations will balance out against demand, which has been sluggish for much of the past year. Macroeconomic conditions remain a struggle, with interest rates expected to remain at higher levels in many Western economies. Growth has also become a concern in China. With the U.S., E.U., and China facing slow economic growth, there is a question of where a consumer-driven revival might surface that could pull orders through the supply chain. Inventories have been a drag on order placement since the second half of 2022 but may become a source of support before the end of 2023/24. After touching the lowest levels in two decades, U.S. apparel import volumes (weight basis) appear to have formed a bottom in March and have been ticking higher. Parallel adjustments in other countries could help lift demand throughout supply chains. However, inventory realignment is a factor the USDA has indicated it is already incorporating into its projections.