Cotton Market Fundamentals & Price Outlook
Recent Price Movement
Cotton benchmarks were flat or lower over the past month.
- Over the past month, the NY/ICE December contract continued to trade sideways within the range between 77 and 85 cents/lb that has contained values since late November 2022. There was a test of the lower end of that range (closing prices dropped to 77.9 cents/lb on June 26th, which was the lowest level since December 2022), but values rebounded to trade near 82 cents/lb more recently.
- The A Index followed the same pattern as NY/ICE futures. Values varied between 88 and 93 cents/lb. Current prices are 92 cents/lb.
- After edging higher in recent months, Chinese prices (China Cotton Index or CC 3128B) were flat over the past month, trading near 110 cents/lb. In domestic terms, prices hovered around 17,400 RMB/ton. The RMB weakened slightly against the dollar, from 7.13 to 7.20 RMB/USD
- Indian spot prices (Shankar-6 quality) shifted slightly lower in recent trading, easing from levels near 89 in much of June to values near 86 cents/lb more recently. Domestic prices decreased from 58,000 to 55,500 INR/candy. The INR was steady against the dollar, holding near 82 INR/USD.
- Pakistani prices fell from 85 to 74 cents/lb over the past month. In domestic terms, prices dropped from 20,500 to 17,000 PKR/maund. The Pakistani rupee strengthened from 285 to 279 PKR/USD.
Supply, Demand, & Trade
The latest USDA report featured a slight increase to world production in 2023/24 (+120,000 bales to 116.8 million) and a slight decrease to global mill-use in 2023/24 (-550,000 bales to 116.4 million).
The global production estimate for 2022/23 was revised +1.7 million bales higher (to 118.0 million) and the world mill-use estimate for 2022/23 was lifted +675,000 bales (to 109.8 million). For 2023/24 figures, the net effect was a +1.1 million bale addition to beginning stocks, which was a major factor behind the +1.7 million increase to the forecast for 2023/24 ending stocks. The current projection for warehoused supply at the end of the 2023/24 crop year is 94.5 million bales. This suggests the fourth-highest volume of ending stocks on record, only behind the volume from 2019/20 (affected by mill closures with COVID) and the levels from 2013/14-2014/15 (when Chinese reserve stocks were setting records).
The increase in 2022/23 production was primarily a result of estimates for larger harvests from India (+1.0 million bales to 26.0 million), Brazil (+500,000 bales to 13.7 million), and Australia (+300,000 bales to 5.8 million). For 2023/24, the slight global increase was primarily a result of an addition to Pakistan (+600,000 bales to 6.5 million) muted by diminished expectations for Australia (-400,000 bales to 5.4 million) and Argentina (-150,000 bales to 1.2 million).
For mill-use, the largest changes for 2022/23 were for India (+500,000 bales to 23.5 million) and Indonesia (+100,000 bales to 1.7 million), and Bangladesh (-100,000 bales to 7.2 million). Updates to use projections for 2023/24 were mostly negative, with forecasts for China (-500,000 bales to 37.0 million), Bangladesh (-100,000 bales to 8.0 million), Turkey (-100,000 bales to 7.9 million), and Vietnam (-100,000 bales to 7.0 million) decreasing month-over-month. The only positive revision for use in 2023/24 that was over 100,000 bales was for Pakistan (+200,000 bales to 10.0 million).
The global trade forecast for 2023/24 was lowered -250,000 bales to 43.5 million. For imports, the largest changes were for China (+250,000 bales to 9.8 million), Pakistan (-300,000 bales to 4.2 million), Indonesia (+100,000 bales to 2.4 million), Bangladesh (-100,000 bales to 8.0 million), and Turkey (-100,000 bales to 4.3 million). For exports, the largest changes in 2023/24 forecasts were for Brazil (+500,000 bales to 9.8 million), the U.S. (-250,000 bales to 13.8 million), Australia (-200,000 bales to 5.8 million), and India (-200,000 bales to 2.2 million).
The USDA released an update to its planted acreage estimates at the end of June. Revisions were minor for upland (-1.1% or -124,000 acres versus the March estimate, from 11.1 million acres to 11.0 million acres) but were significant for pima (-29% or -45,000 acres versus the March estimate, from 154,000 to 109,000 acres).
There have been dramatic changes in the weather for major U.S. growing regions for both upland and pima, with both West Texas (upland) and California (pima) swinging from drought to flooding during the winter and spring. Although weather-related uncertainty remains, the rainfall in West Texas has been considered beneficial and should lead to sharply lower abandonment rates than were suffered last crop year. In California, however, extreme precipitation has not been helpful, and the inability to plant in flooded areas is expected to lead to a smaller pima harvest and may cause tightness in pima supply.
Questions continue to loom from the demand side of the balance sheet. The USDA is suggesting a recovery in mill-use in the upcoming crop year (from 109.8 million bales in 2022/23 to 116.4 million in 2023/24). However, reports from the spinning industry have been persistently downbeat, with complaints about sluggish downstream demand and minimal margins.
Nonetheless, the 2023/24 crop year has yet to begin, and there is considerable time for the business environment to evolve. One source of optimism could come from recent inflation figures. The latest data from the U.S. indicates that the rate of price increases is slowing faster than expected. If the trend toward lower inflation persists, it may lead to fewer interest rate increases. Several other central banks have been following the pattern of rate changes by the Federal Reserve, so the implications are international. If interest rates do not climb as high as has been feared, it would lower an obstacle to economic growth and could lend some support to consumer demand. Another source of eventual support could come from inventory realignment. After surging to keep up with consumer demand after stimulus, inventory concerns pushed U.S. apparel imports to the lowest levels in decades. It is possible that an overcorrection in order reduction throughout supply chains may be underway. After the drawdown concludes, inventory recovery and stabilization could stimulate demand as the new crop year unfolds.
Read the full Monthly Economic Letter: July 2023.