Monthly Economic Letter
Cotton Market Fundamentals & Price Outlook
RECENT PRICE MOVEMENT
U.S and Chinese benchmark prices increased in early August but were flat to lower later in the month and through early September.
- Values for the December NY/ICE futures contract rose in early August from values near 90 cents/lb to those approaching 95 cents/lb. Since mid-August, December contract prices have been flat to lower. Current levels are near 93 cents/lb.
- In the first half of August, the A Index rose from 100 to 103 cents/lb. It has held to values near 103 cents/lb since mid-August.
- The Chinese Cotton Index (CC Index 3128B) increased from 124 to 129 cents/lb in the first half of August. Since the middle of August, prices have been stable near 129 cents/lb. In domestic terms, prices increased from 17,600 to 18,400 RMB/ton. The RMB strengthened slightly against the dollar over the past month, from 6.48 to 6.46 RMB/USD.
- Indian spot prices (Shankar-6 quality) were comparatively stable and generally held to values near 97 cents/lb. In domestic terms, prices held near 55,500 INR/candy. Over the past month, the INR strengthened slightly against the dollar from 74 to 73 INR/USD.
- Pakistani spot prices increased and decreased over the past month. In international terms, values climbed from 96 to 102 cents/lb between early and the end of August. Since early September, Pakistani prices fell back to 96 cents/lb. The PKR weakened against the dollar over the past month, from 164 to 168 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured nearly equal increases in production (+745,000 bales to 119.6 million) and mill-use (+810,000 bales to 124.1 million). Revisions to past crop years decreased to the estimate for 2021/22 beginning stocks (-446,000 bales to 91.3 million). The net effect for the forecast for 2021/22 ending stocks was a -542,000 bale reduction to 86.7 million.
The current figure for 2021/22 global ending stocks is 4.6 million less than the value for 2020/21. It ranks as the seventh-highest on record, but that includes four crop years distorted by elevated levels of Chinese reserves. The current figure for world-less-China ending stocks ranks as the third-highest on record. The current world-less-China stocks-to-use ratio is the third-highest in the modern era (since 2001/02).
At the country-level, the largest changes were for the U.S. (+1.2 million bales to 18.5 million), Australia (+300,000 bales to 4.7 million), Argentina (+100,000 bales to 1.5 million), Benin (-100,000 bales to 1.3 million), Greece (-100,000 bales to 1.4 million), Togo (-125,000 to 125,000), and India (-500,000 bales to 28.5 million).
For mill-use, the largest country-level changes included those for Bangladesh (+200,000 bales to 8.7 million), Brazil (+100,000 bales to 3.2 million), Pakistan (+400,000 bales to 11.0 million), Turkey (+100,000 bales to 8.3 million), and Vietnam (-100,000 bales to 7.5 million).
The global trade estimate was increased +508,000 bales to 46.8 million. In terms of imports, the largest changes were for Bangladesh (+200,000 bales to 8.2 million), Pakistan (+300,000 bales to 5.9 million), and Vietnam (-100,000 bales to 7.5 million). In terms of exports, the largest changes were for the U.S. (+500,000 to 15.5 million), Australia (+100,000 bales to 3.6 million), and Turkey (+100,000 bales to 600,000).
Daily auctions of cotton from the Chinese reserve system continue to sell out. Cumulatively, the round of sales that began in early July have moved nearly 500,000 tons (2.3 million bales) of the 600,000 ton total (2.8 million bales) planned for offer through the end of September. A stated objective of the reserve system in recent years has been the rotation of stocks, which has been interpreted as implying some stability in reserve volumes. As the season progresses, a question for prices will be how aggressive the Chinese state might be in replenishing reserves.
Chinese import data for the entire 2020/21 crop year recently became available. In 2020/21, China reported strong increases from the three largest sources (+3.6 million bales or +166% to 5.7 million bales from the U.S., +696,000 bales or +27% to 3.6 million bales from Brazil, +1.7 million bales or +286% to 2.3 million bales from India) and a significant decline from Australia (fourth-largest source, down 582,000 bales or -62% to 355,000 bales). Collectively, Chinese imports increased 5.7 million bales or +80% year-over-year in 2020/21.
The strength of global trade during the 2020/21 crop year appears to have been a source of support for cotton prices. Notably, the U.S. managed to export its second-highest volume on record despite the COVID pandemic. Along with adverse weather conditions last crop year, the strength of U.S. shipments pulled U.S. ending stocks to their tightest level in seven years (3.0 million bales, in 2013/14 U.S. stocks were 2.4 million bales). With COVID, purchases associated with the Chinese government were likely a reason U.S. exports were so strong.
Phase One is set to expire at the end of the calendar year. Its successor remains unknown, and the related uncertainty clouds the price outlook. Economic growth and downstream demand appear to be supporting demand from other import markets. Any changes to the U.S. export situation will have to be balanced against a larger U.S. crop.
After this month’s +1.2 million addition, the current USDA forecast suggests a U.S. harvest that is +3.9 million bales bigger than last year. USDA crop condition ratings are the best since 2004, with 70% of U.S. planted acres rated in good or excellent. Further increases to the U.S. crop number are possible. Following this month’s set of revisions, the USDA is projecting a +700,000 bale increase to U.S. ending stocks in 2021/22 (from 3.0 to 3.7 million).