Monthly Economic Letter: July 2020

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Chinese, Indian, and Pakistani prices were stable over the past month. NY futures and the A Index drifted slightly higher.

Prices for the December NY futures contract rose from levels near 60 to those near 64 cents/lb.

The A Index climbed from 68 to 70 cents/lb.

In international terms, the China Cotton Index (CC Index 3128B) held near 78 cents/lb. In domestic terms, prices held near 12,000 RMB/ton. The RMB strengthened against the dollar over the past month, from 7.08 to 6.99 RMB/USD.

Indian cotton prices (Shankar-6 quality) were steady around 59 cents/lb. In domestic terms, values decreased from 35,300 to 34,700 INR/candy. The Indian rupee was generally stable near 75 INR/USD.

Pakistani prices dipped a little in the second half of June (from 61 to 58 cents/lb) but recovered to match month-ago levels by early July (61 cents/lb). In domestic terms, values fell from 8,300 to 8,000 PKR/maund and then rose to 8,400 PKR/maund. The Pakistani rupee weakened slightly against the USD over the past month, from 164 to 167 PKR/USD.

Supply, Demand, & Trade

The latest USDA report featured a significant decrease to global production estimates for 2020/21 (-2.5 million bales to 116.2 million). Despite the uptick in new cases of COVID-19 around the world, figures for global mill-use were mostly unchanged (-292,000 bales to 102.4 million for 2019/20 and -115,000 bales to 114.3 million for 2020/21).

The reduction in 2019/20 mill-use caused a small upward revision to 2020/21 beginning stocks. This addition to supply was overwhelmed by the lower harvest projection, however, and the prediction for 2020/21 world-ending stocks decreased (-1.9 million bales to 102.8 million). Even with that decrease, the forecast calls for the second-highest volume of warehoused supply on record. Only in 2014/15, when Chinese reserves reached their peak, were global stocks higher (106.7 million bales).

At the country-level, the largest reductions for 2020/21 production estimates were for the U.S. (-2.0 million bales, to 17.5 million), Turkey (-300,000 to 3.0 million), Tanzania (-175,000 to 430,000), and Mexico (-100,000 to 539,000). These declines were partially offset by an increase for Pakistan (+200,000 bales to 6.5 million).

For mill-use, the only notable country-level revisions for either 2019/20 or 2020/21 were for Mexico (-200,000 bales for 2019/20 to 1.5 million, -100,000 bales for 2020/21 to 1.7 million).

Global trade expectations for 2020/21 were lowered by 1.0 million bales (to 41.8 million). In terms of imports, the largest revisions were for Pakistan (-600,000 bales to 3.9 million), Mexico (-250,000 to 650,000), and Turkey (-100,000 to 4.1 million). In terms of exports, changes to 2020/21 estimates were dominated by the 1.0 million bale reduction for the U.S. (to 15.0 million).

Price Outlook

In the acreage report released at the end of last month, the USDA revised their official estimate for 2020/21 U.S. planted acres to a level 11% below the one issued in March. In April and May, the March number was used to forecast 2020/21 U.S. production. Adoption of the new acreage figure in this month’s set of supply and demand forecasts drove the two million bale month-over-month decrease in the projected size of the U.S. crop.

With less cotton expected to be harvested, less U.S. cotton is projected to be exported (-1.0 million bales relative to June’s estimate). The reduction in production was twice the size of the decline in exports, and a result was a significant decrease to the forecast for 2020/21 U.S. ending stocks (a 200,000 bale addition to 2019/20 exports and a corresponding decrease to 2020/21 beginning stocks was another contributing factor). Month-over-month, there was a 1.2 million bale month-over-month decrease (from 8.0 to 6.8 million bales). This adjustment caused a reversal in the direction of year-over-year change in U.S. stocks, from a sizeable increase to a decrease. A 700,000 bale increase was forecast in June. A 300,000 bale reduction is currently predicted.

Nonetheless, the current forecast for 2020/21 U.S. ending stocks calls for one of the highest levels of warehoused cotton in recent history. Dry conditions have emerged in the important West Texan growing region. If abandonment and yield losses mount, the weight from U.S. stocks on prices could ease further. However, the level described by the current estimate for ending stocks suggests that the likelihood of a tight U.S. supply situation in 2020/21 is remote.

The same is true for the rest of the world. Global stocks in 2020/21 are projected to reach the second-highest volume ever (102.8 million bales predicted for 2020/21, there were 106.7 million bales of ending stocks in 2014/15).

India is another country where supply has accumulated, and India is expected to easily set successive records for ending stocks in 2019/20 and 2020/21 (doubling the previous record of 10.5 million bales set in 2014/15 by 2020/21). For the new crop year, monsoon rains have been both early and plentiful. These rains have facilitated planting, and the Indian Department of Agriculture indicates that plantings are currently twice the level from one year ago. Pakistan has also benefitted from favorable weather. Pest infestations are a persistent threat on the subcontinent, but early supportive rainfall suggests the possibility of healthy yields in both countries.

A question for the market is how much of this cotton may be able to find a buyer. The slight downward trend in global case incidence for COVID that existed in April has been replaced by an exponential resurgence. The initial shock of the pandemic has passed, but its resurgence suggests that the virus and its many effects could be around longer than may have been expected a month or two ago.

Read the full Monthly Economic Letter: July 2020.