Monthly Economic Letter: June 2020

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Several benchmark prices drifted higher over the past month. Indian prices were stable. Pakistani prices decreased.

The nearby July NY futures contract increased slightly, from 58 to 60 cents/lb. Prices for the December contract also rose from levels near 58 to those near 60 cents/lb.

The A Index climbed from 65 to 68 cents/lb.

In international terms, the China Cotton Index (CC Index 3128B) increased from 73 to 78 cents/lb. In domestic terms, prices rose from 11,500 to 12,100 RMB/ton. Although the RMB did weaken against the dollar in recent weeks, it recovered. The latest exchange rate is even with levels one month ago (7.08 RMB/USD).

Indian cotton prices (Shankar-6 quality) were flat near 59 cents/lb. In domestic terms, values held near 35,300 INR/candy. The Indian rupee was stable near 76 INR/USD.

Pakistani prices decreased in international terms, from 65 to 61 cents/lb. In domestic terms, values fell from 8,600 to 8,300 PKR/maund. The Pakistani rupee weakened against the USD over the past month, from 160 to 165 PKR/USD.

Supply, Demand, & Trade

The latest USDA report featured large decreases in global mill-use estimates for both the 2019/20 (-2.3 million bales, to 102.7 million) and 2020/21 crop years (-2.1 million bales, to 114.4 million). Updates to production estimates were comparatively minor (+300,000 bales to 123.0 million for 2019/20, -215,000 bales for 2020/21 to 118.7 million).

A result was significant increases in figures for ending stocks in both crop years (+3.4 million bales to 100.6 million in 2019/20, +5.2 million bales to 104.7 million bales for 2020/21). The current projection for 2020/21 ending stocks calls for the largest volume of global warehoused supply since the record was set in 2014/15 (106.7 million bales). Given ongoing uncertainty regarding the full effects of the COVID-19 pandemic on the world economy, further downward revisions to mill-use and further upward revisions to ending stocks are possible.

At the country-level, the largest decreases in mill-use estimates were for China (-1.0 million bales for both 2019/20 and 2020/21, to 33.0 million in 2019/20 and 37.0 million bales in 2020/21) and India (-500,000 bales in 2019/20 and 2020/21, to 20.0 and 23.0 million). For 2019/20, notable reductions apart from China and India were for Bangladesh (-300,000 bales to 6.2 million), the U.S. (-200,000 to 2.5 million), Vietnam (-200,000 to 6.1 million), and Brazil (-100,000 to 3.0 million). Outside China and India, the largest changes for 2020/21 mill-use forecasts included those for Pakistan (-200,000 to 10.3 million), Turkey (-100,000 to 6.9 million), the U.S. (-100,000 to 2.8 million), and Uzbekistan (-100,000 to 3.1 million).

For production, the largest country-level changes for 2019/20 included those for Turkey (-150,000 bales to 3.5 million) and Argentina (+400,000 to 1.4 million). The largest production updates for 2020/21 included those for Turkey (-350,000 bales to 3.3 million), Uzbekistan (-150,000 to 3.3 million), Tanzania (+110,000 to 550,000), and Argentina (+350,000 to 1.4 million).

Price Outlook

With estimates for mill-use falling and projections for ending stocks rising, there has been a contradiction in price movement and trends in market fundamentals over the past couple of months.

There are potential arguments why prices may have been able to gain ground despite projections for near-record global stocks by the end of 2020/21. One is that market participants may be less pessimistic than the USDA regarding the post-pandemic recovery. Another potential explanation is the vast increase in liquidity resulting from central banks around the world expanding the money supply. This could explain some of the recent correlations between cotton prices and equities (e.g., the correlation between the daily close for the NY Nearby and the S&P 500 was 89% between April and early June this year, it was 38% over the preceding 12 months).

Nonetheless, market fundamentals could present downside risks to cotton prices. Recent projections for global economic growth have been getting revised lower. The World Bank recently released figures suggesting that global GDP could contract by 5.2% in 2020. In April, the International Monetary Fund (IMF) predicted the decline would be 3.0%.

Under these tough economic conditions,  clothing has proven a product category where consumers have chosen to pull back. In the latest apparel spending data for the U.S. (April), there was a 48% decrease year-over-year. The evaporation of consumer demand has saddled retailers with inventory, and there have been price decreases to help move product. The U.S. consumer price index for clothing is currently at its lowest level since 1987 (data for April). Although there are some bright spots, such as online spending, the combination of lower sales volumes and lower margins does not put many retailers in the financial position to maintain order volumes.

U.S. import data are already showing drastic effects. In data for April (latest available), the raw fiber equivalence (import weight, with some allowance for fiber lost in manufacturing) of apparel imports of all-fiber content was down 45% year-over-year. The raw fiber equivalence of cotton fiber contained in apparel imports was also down 45%. April is commonly the lightest month of the year for cotton weight in U.S. apparel imports. However, the year-over-year reduction in April alone, for the U.S. alone, represented 420,000 bales of lost cotton consumption.

The situation facing U.S. retailers is not unique, and it remains to be seen how many months the world will have to face any lingering demand-related effects from the global COVID pandemic. While a medical breakthrough could reverse the outlook dramatically, risks for resurgence remain, and financial damage has already been inflicted throughout supply chains.

Read the full Monthly Economic Letter: June 2020.