Monthly Economic Letter: May 2020

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Most benchmark prices were flat to higher over the past month. Indian prices edged slightly lower.

The nearby July NY futures contract rose from 53 to 58 cents/lb.

The A Index climbed from 63 to 65 cents/lb.

In international terms, the China Cotton Index (CC Index 3128B) was comparatively stable near 73 cents/lb. In domestic terms, prices were also flat and traded around 11,400 RMB/ton. The RMB was steady against the dollar near 7.08 RMB/USD.

Indian cotton prices (Shankar-6 quality) eased from 62 to 60 cents/lb. In domestic terms, values fell from 37,000 to 35,700 INR/candy. The Indian rupee was stable near 76 INR/USD.

Pakistani prices increased slightly in international terms, from 64 to 66 cents/lb, over the past month. In domestic terms, values fell from 8,800 to 8,600 PKR/maund. The Pakistani rupee strengthened from 167 to 160 PKR/USD.

Supply, Demand, & Trade

The USDA issues its first complete set of estimates for an upcoming crop year in May. These forecasts suggest that production will be slightly lower than 2019/20 levels (-3.0% or -3.7 million bales, from 122.7 million in 2019/20 to 118.9 million in 2020/21). For mill-use, the projection calls for a sharp rebound relative to the current 2019/20 estimate (+11.0% or +11.5 million bales, from 105.0 for 2019/20 and 116.5 million in 2020/21). The recovery in demand is expected to be a result of record cotton supply (production plus stocks) and a revived global economy.

At the country-level, most of the largest projected year-over-year changes in production are negative. Reductions are anticipated in India (-2.0 million bales, to 28.5 million), Brazil (-1.2 million bales to 12.0 million), China (-0.8 million bales, to 26.5 million), the U.S. (-0.4 million, to 19.5 million), and Mexico (-0.3 million, to 1.2 million). With an assumption of improved weather, Australia is predicted to have the biggest year-over-year increase (+1.1 million bales, to 1.7 million).

For country-level mill-use, all of the largest expected year-over-year changes are positive. These include the increases for China (+4.0 million bales to 38.0 million), India (+3.0 million bales to 23.5 million), Pakistan (+1.5 million to 10.5 million), Turkey (+0.6 million to 7.0 million), Bangladesh (+0.5 million to 7.0 million), Vietnam (+0.5 million to 6.8 million), and Indonesia (+0.3 million, to 3.0 million).

Despite the forecast improvement in global cotton demand, global cotton stocks are predicted to remain high. At the end of 2019/20, warehoused supply is projected to reach 97.2 million bales. This will be the highest level of carryout since 2014/15, when global stocks hit their record level of 106.7 million bales. During this time, China was winding down its stockpiling program, and a significant proportion of global stocks were not freely available to the market. Under current market conditions, a much greater percentage of global stocks are available for shipment. In 2020/21, ending stocks are forecast to increase again, to 99.4 million bales. This volume of available supply can be expected to weigh on prices throughout the 2020/21 season.

Trade is predicted to expand next crop year (+8.9% or +3.5 million bales, from 39.3 to 42.8 million). In terms of imports, the largest changes include those for China (+2.0 million bales to 9.5 million), Vietnam (+0.5 million to 7.0 million), and Bangladesh (+0.4 million to 7.0 million).

Price Outlook

Despite the persistent ravaging effects of COVID-19 on the global economy, cotton prices were able to notch some gains over the past month. One supportive factor has likely been strong U.S. export sales to China. These sales have been attributed to purchasing by the Chinese reserve system and can be seen as part of the fulfillment of the Phase One agreement. Another source of support could come from correlation with financial markets. Stock indexes have edged successively higher in the face of a stream of economic statistics that are unprecedented in terms of the deterioration they describe.

Given that much of the world is either still shut down or in the early stages of re-opening after shutdown, considerable uncertainty remains regarding how long and deep the economic downturn might be and what form the eventual recovery might take. With three months left until the end of the 2019/20 crop year, there is still time for further downward adjustments to consumption estimates and further upward adjustments to ending stocks. For 2020/21, the outlook is even less clear, but it has become apparent already that significant financial damage has been dealt to apparel retailers.

Both the U.S. and European Union have also released estimates for consumer spending by category in March. In each location, clothing suffered more than any other set of goods (certain service categories, such as travel, fared worse). In the U.S., consumer spending on apparel was down 28% year-over-year. In European Union countries, consumer spending on apparel was down 42% year-over-year. In both cases, these were the steepest declines on record, and steeper decreases could be expected in data for April. Part of the pullback can be attributed to the unavailability of supply, with brick and mortar stores shuttered. Part can also be attributed to demand, with consumers postponing purchases until their outlooks on employment and income improve.

Once recovery begins, the question is how strong consumers’ demand might be. Since it was the first affected and the first to recover, China may provide some guidance. Retail sales from China for March and April, however, have not been encouraging with overall spending down around 20% year-over-year in each month. This contrasts sharply with year-over-year growth of near 10% before the outbreak and suggests that consumers everywhere may be conservative in their spending after being shocked by the speed and depth of the COVID-19 crisis.

Read the full Monthly Economic Letter: May 2020.