Cotton Market Fundamentals & Price Outlook
Recent Price Movement
Most cotton benchmarks moved slightly lower over the past month.
- The May NY/ICE contract tested the lower end of its range between 78 and 88 cents/lb, which has held values since November. After failing to break below 80 cents/lb in the middle of February, prices rebounded to levels near 85 cents/lb before the end of last month and have traded between 82 and 85 cents/lb through early March.
- Prices for the December NY/ICE contract, reflecting market expectations for the 2023/24 crop year, dipped to values near 82 cents/lb in the middle of February but otherwise traded sideways near 85 cents/lb for most of the past month.
- The A Index was relatively stable near one dollar for much of the past month, but shifted to values below 100 cents/lb since the middle of February.
- Chinese prices represented by the China Cotton Index (CC 3128B) decreased from early February to early March (from 107 to 101 cents/lb), erasing most of the gains made in the previous month. In terms of RMB/ton, values eased from 15,900 to 15,600. The RMB weakened against the USD over the past month, from 6.78 to 6.93 RMB/USD.
- Indian spot prices (Shankar-6 quality) increased slightly over the past month, from 94 to 97 cents/lb. In terms of INR/candy, values rose from 61,500 to 62,400. The INR traded held at levels near 82 INR/USD.
- Pakistani prices decreased from 97 to 88 cents/lb. In domestic terms, prices fell from 22,000 to 20,000 PKR/maund. Exchange rates for the PKR were volatile over the past month, but it finished the period near the same level it started (275 PKR/USD).
Supply, Demand, & Trade
The latest USDA report featured a slight increase to the global production figure (+719,000 bales, to 115.1 million) and a slight decrease to the global mill-use estimate (-555,000 bales, to 110.1 million). 2022/23 beginning stocks were lifted +878,000 bales (to 86.1 million), and the net effect of these changes on 2022/23 ending stocks was a +2.1 million bale increase.
The current carryout projected by the USDA in 2022/23 is 91.1 million bales. Outside of 2019/20 (COVID) and the period when China was massing reserves (2013/14-2015/16), this volume for 2022/23 is the highest on record. The current figure for the global stocks-to-use ratio is 82.8%, which also ranks as the highest in the modern era (at least back to 1960) outside of 2019/20 and 2012/13-2015/16.
At the country-level, the largest revisions to 2022/23 production numbers included those for China (+1.0 million to 29.5 million), Australia (+500,000 bales to 5.5 million), Uzbekistan (-200,000 bales to 2.9 million), and India (-1.0 million to 24.5 million).
For mill-use, the largest changes were for Turkey (-300,000 to 7.7 million), Pakistan (-200,000 to 8.6 million), Uzbekistan (+150,000 to 2.9 million), Bangladesh (-100,000 bales to 8.1 million), and Indonesia (-100,000 to 1.9 million).
The global trade forecast was lowered -865,000 bales to 39.6 million. For imports, the largest changes included those for China (-250,000 bales to 7.5 million), Bangladesh (-200,000 to 7.7 million), Pakistan (-200,000 to 4.3 million), Indonesia (-100,000 to 1.8 million), and Turkey (-100,000 to 4.2 million). For exports, the largest changes were for Brazil (-300,000 to 7.7 million), India (-300,000 to 2.2 million), and Argentina (-100,000 to 500,000).
The USDA released a preliminary partial set of forecasts for the upcoming 2023/24 crop year at their Annual Outlook Forum in late February.
No meaningful change is forecast for global production next crop year (-100,000 bales, from 115.1 million in 2022/23 to 115.0 million bales in 2023/24). While cotton prices have held at levels above historical averages, they have not kept pace with increases for crops that can compete with cotton for acreage, notably corn and soybeans. As a result, planted acreage is expected to decrease across a range of locations, including China, India, the U.S., Turkey, and West Africa.
However, weather and pest-related issues in 2022/23 underlined that planted acres do not always translate into acres harvested. With lower planted acreage, assumptions of a return to average conditions in countries like the U.S. (drought in 2022/23), Pakistan (flooding), Australia (flooding), and West Africa (pests) are the main reason production is expected to be higher in 2023/24. These gains are expected to offset the effects of lower acreage and a return to trend for countries with strong yields this crop year (e.g., China and Turkey).
Volatility has dominated the demand side of the market balance sheet since the onset of COVID. In 2023/24, the USDA suggests a comparatively large increase in mill-use (+5.4 million bales to 115.5 million). The addition is expected to result from a recovery in order placement following the current inventory adjustment, which has sharply lowered demand throughout the cotton supply chain.
The net result from these projections is that 2023/24 ending stocks are forecast to decrease slightly (-500,000 bales, to 89.6 million when applied to the current figure for 2022/23 stocks). Outside of the period of high Chinese reserves (2013/14-2015/16) and 2019/20 (COVID), this volume would rank among the highest on record.
From this early standpoint, ahead of an upcoming crop year, a significant degree of uncertainty is always associated with these forecasts. For 2022/23, the level of uncertainty is higher than usual.
The trajectory of the global economy looms large. The latest data releases indicate inflation has yet to be cured, which may mean interest rates will have to climb higher. Meanwhile, labor markets have proven resilient, consumers still have savings from the stimulus, and COVID has faded as a pressing threat. Geopolitical developments are unknowable but may prove influential.
The weather also has proven volatile in recent years. Climate forecasters indicate that La Nina may be transitioning to El Nino. El Nino is associated with a reversal in conditions common under La Nina in many areas, including West Texas. The timing of any changes in weather patterns relative to crop development will shape the harvest outlook.
Read the full Monthly Economic Letter: March 2023.