Monthly Economic Letter: February 2019

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Most cotton prices were stable over the past month. Chinese prices moved slightly higher. Indian prices moved slightly lower.

Prices for the March NY futures contract were range-bound over the past month, holding to values between 72 and 75 cents/lb.

Values for the A Index were also mostly unchanged, maintaining levels between 82 and 84 cents/lb.

Chinese cotton prices represented by the CC Index (3128B) drifted slightly higher in international (from 102 to 105 cents/lb) and domestic terms (from 15,400 to 15,500 RMB/ton).

Indian spot prices (Shankar-6 quality) drifted slightly lower in international (from 78 to 75 cents/lb) and domestic terms (from 43,200 to 42,200 INR/candy).

Pakistani spot prices were steady at values near 76 cents/lb or 8,700 PKR/maund.

Supply, Demand, & Trade

After missing the update in January due to the partial government shutdown, the USDA resumed the process of revising supply and demand estimates this month. The latest report featured a slight decrease in global production (-288,000 bales, from 118.7 to 118.5 million) and a sizable decrease in global mill-use (-2.0 million bales, from 125.6 to 123.6 million).

Along with a higher estimate for beginning stocks (+605,000 bales), the larger decrease in consumption relative to production caused the forecast for 2018/19 ending stocks to rise 2.3 million bales (from 73.2 to 75.5 million). Nearly all of the global upward revision to ending stocks is expected to occur in China, where the forecast for warehoused supply at the end of 2018/19 increased 2.0 million bales (to 32.3 million).

The largest country-level additions to production figures were for China, (+500,000, to 27.5 million), Brazil (+400,000, to 11.4 million), Australia (+100,000, to 2.6 million), and Pakistan (+100,000, to 7.5 million). The largest decreases included those for Turkey (-600,000, to 3.7 million), India (-500,000, to 27.0 million), Burkina Faso (-200,000, to 1.2 million), and the U.S. (-198,000, to 18.4 million).

For mill-use, all country-level changes were negative. The largest reductions were for China (-1.0 million, to 40.5 million), India (-550,000 for 2017/18 and -500,000 for 2018/19, to 24.8 million in 2018/19), Turkey (-200,000, 7.0 to 6.8 million), Vietnam (-200,000, to 7.3 million), and the U.S. (-100,000, to 3.2 million).

Global trade projections increased 594,000 bales (to 42.3 million). In terms of imports, the largest changes were for China (+500,000, to 7.5 million), Turkey (+300,000, to 3.2 million), Pakistan (+100,000, to 3.0 million), Vietnam (-200,000, to 7.4 million), and Bangladesh (-100,000, to 8.0 million). For exports, the largest changes included those for Brazil (+400,000, to 6.2 million), India (+100,000, to 4.5 million), Burkina Faso (-100,000, to 1.3 million), and Turkey (-100,000, to 300,000).

Price Outlook

With the end of the partial government shutdown on January 25th, the USDA has been fully operational for a couple weeks. Although reporting has restarted, it will be another few weeks until publication release schedules are brought up-to-date. Given the current trade environment, a source of uncertainty is the pace of U.S. export sales and shipments. Weekly USDA reporting on sales and shipments has resumed, but will not be back on the normal schedule until February 22nd.

In addition, data have not been consistently available from China. The Chinese government has been updating the way it publishes its trade data. As a result, detailed Chinese import and export figures were unavailable throughout much of 2018. The updating process appears to be finished, and monthly cotton import data are now available. These figures inform discussion of the effects of higher Chinese tariffs on U.S. exports.

From July through December (tariff increase applied in July, latest available data for December), overall Chinese imports totaled 4.1 million bales. This volume represents a strong increase over the same time period last year (+73%, or +1.7 million bales). U.S. exports to China during the six months between July and December were down 19% year-over-year (-125,000 bales, to 544,000). The strong increase in Chinese imports, paired with the decrease from the U.S. (which had a 46% share of the Chinese market in 2017/18), implied opportunity for other exporters. In volume terms, the biggest gains have come from Australia (+763,000 bales yearover- year July-December), Brazil (+477,000 bales), and India (+356,000 bales). These have corresponded to strong percentage gains from each of these exporters (+80% for Australia, 196% for Brazil, +300% for India) as well as a range of smaller sourcing locations (+150-200% for several West African shippers).

It is unknown how the trade dispute may evolve with negotiations ongoing. In December, there was some easing of tensions, with the U.S. announcing a delay in a scheduled increase in tariffs (a set of goods valued at $200 billion that faced a ten percentage point increase in duties in September was scheduled to face a further fifteen percentage point increase on January 1st). The revised deadline for a settlement is March 1st, and time is running out for an agreement to be reached ahead of this next round of escalation. Whether or not an agreement is eventually reached that includes cotton presents considerable uncertainty for trade flows and price direction both in the current and upcoming crop year.

The National Cotton Council released results from its Prospective Plantings survey of cotton growers on February 9th. Findings suggest that U.S. cotton growers will plant 3% more cotton in 2019/20 (survey has an average absolute error of 10% over the past ten years). This would represent the 4th consecutive increase in plantings, following strong gains near 20% for both 2016/17 and 2017/18 and an increase near 10% for 2018/19. While the increase in acreage is significant, what likely will prove more important for the supply situation next crop year is the weather. After challenging conditions were suffered across the U.S. cotton belt in 2018/19, a return to normal or beneficial growing conditions could result in a very large harvest. Early moisture levels have led private forecasters to float estimates near 24 million bales, essentially equal to the U.S. record. Such a large harvest will require strong export sales in order to prevent stocks from accumulating and from downward pressure on prices from building.

Read the full Monthly Economic Report: February 2019.