Monthly Economic Letter
Cotton Market Fundamentals & Price Outlook
RECENT PRICE MOVEMENT
All international benchmark prices increased over the past month.
- The NY December futures contract climbed from 67 to as high as 72 cents/lb near the end of October. More recently, prices eased back to 70 cents/lb.
- Cotlook’s A Index rose from 73 to 76 cents/lb over the past month.
- In international terms, the China Cotton Index (CC Index 3128B) increased from 88 to 100 cents/lb. In domestic terms, values rose from 12,900 to 14,500 RMB/ton. The RMB strengthened against the dollar, from 6.74 to 6.57 RMB/USD.
- Indian cotton prices (Shankar-6 quality) increased from 66 to 69 cents/lb in international terms. In domestic terms, values increased from 37,900 to 40,200 INR/candy. The Indian rupee weakened against the USD from 73.2 to 74.2 INR/USD.
- In international terms, Pakistani prices increased from 69 to 74 cents/lb. In domestic terms, prices climbed from 9,400 to 9,700 PKR/maund. The Pakistani rupee strengthened against the dollar, from 164 to 159 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured small reductions to global production (-158,000 bales to 116.1 million) and mill-use estimates (-158,000 bales to 114.1 million) for 2020/21. An increase to the figure for the Brazilian 2019/20 harvest (+330,000 bales to 13.8 million) and a few other small changes to historical numbers pushed world 2020/21 beginning stocks higher (+378,000 bales to 99.6 million). With offsetting revisions to production and consumption, the addition to beginning stocks lifted the forecast for 2020/21 ending stocks (+301,000 bales to 101.4 million).
At the country-level, the largest additions to estimates for 2020/21 production included those for Australia (+400,000 bales to 2.5 million), China (+250,000 bales to 27.5 million), and Uzbekistan (+150,000 bales to 3.5 million). The largest decreases were for Pakistan (-800,000 bales to 5.0 million) and Turkmenistan (-110,000 bales to 900,000). Despite the series of hurricanes, the U.S. production number was essentially unchanged, and the small revision was a positive one (+47,000 bales, holding the U.S. harvest estimate at 17.1 million)
For mill-use, the only change over 100,000 bales was for Pakistan (-200,000 bales to 9.8 million).
Global trade forecasts were revised higher (+605,000 bales to 42.8 million). The largest changes to import forecasts included those for Pakistan (+500,000 bales to 4.3 million) and Turkey (+100,000 bales to 4.4 million). For exports, the largest changes were for Brazil (+300,000 bales to 10.0 million), Australia (+200,000 to 1.5 million), and Uzbekistan (+100,000 bales to 300,000).
The largest increase in prices over the past month was in China. A portion of the gains in Chinese prices has been attributed to speculative forces. However, speculators make trades for a reason, and a range of potential explanations have been offered.
These include multiple concerns centered on the availability of high-quality fiber to Chinese mills. The weather in Xinjiang posed challenges to the domestic harvest. An unofficial ban on Australian fiber may limit access to quality cotton from that country. In addition, the U.S. crop suffered a series of hurricanes that passed over a lot of acres with exposed bolls. This is expected to impact U.S. fiber quality, but the extent of that damage will not be known until the cotton has been pulled from fields and run through classing.
Beyond quality-related concerns, there have been encouraging signs for demand. The International Monetary Fund (IMF) released updates to their forecasts for global economic growth last month. The new figures suggest a smaller contraction than was projected in June (-4.9% in June, -4.4% in October). For 2021, the projection for world GDP was lowered (-0.2 percentage points) but still calls for a significant recovery (+5.2%).
The outlook for trade-related demand has also improved for a range of reasons. In the near-term, one of them is the impending closure of the window for shipments to China to be completed using 2020 quota allocations. Compounding the incentive to use quota is the current separation between Chinese and international prices, making imports a more profitable option.
There is also the Phase One deal. The USDA and the U.S. Office of the Trade Representative released an update on agricultural trade in late October. Using March as a starting point, the report examined the sum of export deliveries already concluded as well as contracted sales that have yet to be delivered. With these data, the report indicated record sales for beef, pork, corn, and soybeans had been made to China and that Chinese purchases represented 71% of the value of the 2020 target. In bale terms, the U.S. cotton commitment to China is twice the volume from a year ago (3.6 million bales contracted for delivery in 2020/21, 1.8 million bales were contracted for 2019/20 delivery one year ago).
Outside China, another contributor to import demand is the difficulty suffered by the Pakistani crop this season. The current forecast for the Pakistani harvest is 5.0 million bales. This is less than half the volume harvested as recently as 2014/15 and ranks as the smallest harvest since 1984/85. As a result, Pakistani imports are predicted to set a record in 2020/21 (4.3 million bales).
Collectively, the issues associated with production and international trade could be considered sources of support for prices. However, these factors have to be balanced against the context of global stocks. With COVID and its effects on demand last crop year, the world made the second-largest addition to stocks on record. Even with the slight downward trend in global harvest estimates in recent months, projections for this crop year’s production still call for another surplus (+2.1 million bales). At the end of the 2020/21 season, warehoused supplies are forecast to be over 100 million bales and rank as the second-highest volume on record.