Monthly Economic Letter: November 2018

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Most benchmark prices were unchanged over the past month. An exception was the CC Index, which moved lower.

Values for the December NY futures contract were range-bound, generally trading between 76 and 80 cents/lb.

The A Index has been steady since mid-October, maintaining levels near 87 cents/lb.

The Chinese Cotton Index (CC Index 3128B) moved lower in both international and domestic terms, dropping from 105 to 102 cents/lb and from 16,000 to 15,700 RMB/ton.

Indian spot prices (Shankar-6 quality) were stable in international and domestic terms, holding to levels near 81 cents/lb and near 46,400 INR/maund.

Pakistani spot prices were also stable. In international terms, values held near 80 cents/lb.  In local terms, values held near 8,750 PKR/candy.

Supply, Demand, & Trade

This month’s USDA report featured reductions to world production (-2.3 million bales, from 121.7 to 119.4 million) and world mill-use (-875,000, from 127.8 to 126.9 million).  With the decrease in production outpacing the decrease in consumption, the estimate for global ending stocks decreased (-1.8 million bales, from 74.4 to 72.6 million).  All of the global decrease was a result of declines in forecast stocks outside China (from 44.6 to 42.7 million bales).  Nonetheless, ending stocks for the world-less-China are still projected to increase 400,000 bales year-over-year in 2018/19 and to set a new record.

This month, the USDA made their first adjustment to U.S. production since observing damage from hurricane Michael, which hit the largest producing states in the southeast U.S.  Due to the storm, the U.S. crop forecast was lowered 1.4 million bales, from 19.7 to 18.4 million.  Harvest projections also decreased for India (-700,000 bales, from 28.7 to 28.0 million), Pakistan (-500,000, from 8.5 to 8.0 million), and Turkmenistan (-100,000, from 1.3 to 1.2 million).  The only notable increase was for Benin (+425,000, from 850,000 to 1.3 million).

Country-level reductions to mill-use estimates were widespread.  The largest changes included those for India (-200,000 bales, from 25.5 to 25.3 million), Pakistan (-200,000, from 11.0 to 10.8 million), Turkey (-200,000, from 7.3 to 7.1 million), Brazil (-100,000, from 3.6 to 3.5 million), Indonesia (-100,000, from 3.7 to 3.6 million), and the U.S. (-100,000, from 3.4 to 3.3 million).  There were no country-level increases over 100,000 bales.

The global trade forecast decreased slightly (-325,000 bales, from 41.4 to 41.1 million).  In terms of imports, the largest revisions were for Turkey (-200,000, from 3.1 to 2.9 million), Indonesia (-100,000, from 3.8 to 3.7 million), Vietnam (-100,000, from 7.7 to 7.6 million), and Pakistan (+100,000, from 2.5 to 2.6 million).  For exports, the largest revision was for the U.S., where the smaller crop pulled the U.S. export forecast 500,000 bales lower (from 15.5 to 15.0 million bales).  Other notable revisions to export figures included those for Benin (+375,000, from 800,000 to 1.2 million), Brazil (+100,000, from 5.4 to 5.5 million), India (-100,000 from 4.4 to 4.3 million), Turkmenistan (-100,000, from 625,000 to 525,000), and Uzbekistan (-100,000, from 800,000 to 700,000).

Price Outlook

As more fiber is pulled from fields with the northern hemisphere harvest, uncertainty is being removed from the supply side of the balance sheet.  At the same time, questions appear to be mounting regarding demand.  The U.S., China, and the E.U. all reported slower economic growth in the third quarter.  The slowdown in these major markets were reflected in last month’s widespread set of downward revisions to the International Monetary Fund’s (IMF) forecasts for GDP growth in both 2018 and 2019.  A consequence of slower economic growth tends to be slower consumer demand for apparel and home textiles.  As a result, it is associated with slower growth in mill-use, and the weaker outlook for GDP may have driven this month’s widespread set of downward revisions to consumption estimates.

Imports are another component of demand, and the trade relationship between the U.S. and China continues to present a major source of uncertainty.  In recent weeks, the outlook has wavered between expectations of further escalation and hope for compromise, but the effect on U.S. export commitment to China has been increasingly negative.  Initially, the response of Chinese mills to the tariff increase on U.S. cotton appeared to be one of wait-and-see, maintaining existing contracts but holding off on purchases of new ones.  More recently, cancelations have begun.  Despite starting the crop year with 36% more cotton contracted for shipment to China than last year, the current U.S. commitment to China is now 12% below the volume one year ago.

Weakness in U.S. export sales extends beyond China.  Most notably, U.S. sales to Turkey, who traditionally ranks among the top three destination for U.S. exports, are down significantly (-46% year-over-year).  Sales to other markets have also been slow in recent weeks.  This is notable because this is the time of year when U.S. export sales generally start to accelerate as more cotton has been harvested, classed, and prepared for shipment.

With cancelations from China, and weaker than average sales to other markets, the trendline in U.S. export commitment has been more horizontal than average.  If maintained, the level of U.S. contracted sales will fall below the level from one year ago at some point in the next few weeks.  The smaller U.S. crop resulting from hurricane damage is a mitigating factor, but fewer U.S. exports suggest higher U.S. ending stocks.  With the U.S. being the world’s largest exporter, this can put downward pressure on prices globally.

Longer-term, stabilization of Chinese reserve stocks can be expected to be an eventual source of support.  Simple maintenance of Chinese reserves requires Chinese imports to match China’s production deficit.  This implies a tripling of Chinese imports from recent levels near five million bales to those close to fifteen million bales.  It is notable that even though this strong increase in demand is foreseen, and that Chinese mills are facing the constraint of higher tariffs on supplies from the world’s largest exporter, Chinese prices have been decreasing. This suggests that demand may currently be a greater concern than supply.

Read the full Monthly Economic Letter: November 2018.