Monthly Economic Letter: October 2022

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Volatility was a feature of many markets, and most benchmark prices moved sharply lower over the past month.

  • The December NY/ICE futures contract fell from levels near 105 cents/lb in early September to those as low as 83 cents/lb in early October. After some rebound, prices fell the four cent limit with the release of the latest USDA report to 84 cents/lb.
  • The A Index dropped from 124 to 102 cents/lb over the past month.
  • The China Cotton Index (CC 3128B) decreased more calmly than NY/ICE futures and the A Index, with values easing from 103 to 98 cents/lb. In domestic terms, prices fell from 15,700 to 15,500 RMB/ton. The RMB weakened against the dollar, from 6.92 to 7.18 RMB/USD.
  • Despite dropping sharply over the past month, Indian spot prices (Shankar-6 quality) remain the highest of all benchmarks. Values fell nearly 30 cents/lb between early September and early October, from 139 to 110 cents/lb. The decline was from 86,500 to 71,000 INR/candy in domestic terms. The INR weakened from 79 to 82 INR/USD.
  • Pakistani prices fell from 119 to 102 cents/lb. In domestic terms, prices dropped from 22,500 to 18,300 PKR/maund. The PKR traded erratically against the USD but ended the past month stronger (from 230 to 217 PKR/USD).

Supply, Demand, & Trade

The latest USDA report featured a decrease in world production (-395,000 bales to 118.1 million) and a larger decrease in global mill-use (-3.0 million bales to 115.6 million). The reduction to the 2022/23 consumption estimate was paired with a -2.1 million bale decrease to mill-use in 2021/22. Upward revisions for mill-use near one million bales for both 2018/19 and 2019/20 muted the net effect on the forecast for 2022/23 world-ending stocks, but the increase was still a substantial +3.1 million bales to 87.9 million. If realized, this would be the largest volume for global stocks since 2019/20.

At the country-level, the largest changes to production figures included those for Pakistan (-300,000 bales to 5.2 million) and Benin (-175,000 bales to 1.4 million).

For mill-use, all notable revisions for 2022/23 were negative. These included -1.0 million bale reductions for China (to 36.5 million) and India (to 24.0 million) as well as reductions for Pakistan (-500,000 bales to 10.0 million), Turkey (-200,000 bales to 8.3 million), Mexico (-100,000 bales to 1.8 million), and Vietnam (-100,000 to 6.7 million).

The global trade forecast was lowered by -1.0 million bales to 43.6 million. The largest updates to import figures were all negative and included those for China (-300,000 bales to 8.7 million), Pakistan (-200,000 bales to 4.8 million), Mexico (-100,000 bales to 1.0 million), Turkey (-100,000 bales to 4.7 million), and Vietnam (-100,000 bales to 6.8
million). All notable adjustments to export forecasts were also all negative. These covered Australia (-200,000 bales to 6.2 million), Brazil (-200,000 to 8.4 million), India (-200,000 bales to 3.5 million), Benin (-100,000 to 1.4 million), Cote d’Ivoire (-100,000 to 875,000), and Greece (-100,000 to 1.2 million).

Price Outlook

Price decreases over the past month indicate that demand-related concerns have been winning the contest between the competing storylines involving a weaker downstream outlook and lower production expectations in a couple key cotton-growing countries. In addition, while the severe weather-driven production challenges in the U.S. and Pakistan have garnered many headlines, related counterpoints concerning world production have gotten less attention.

Cotton is a global commodity. In any given crop year, when a country or a group of countries suffer adverse conditions, other countries tend to have better weather. In 2022/23, Brazil and Australia are forecast to collect record or near-record harvests. China and India are also projected to grow more cotton than in 2021/22. The net result is that global production is expected to increase year-over-year, despite the problems in the U.S. and Pakistan.

With this month’s revisions to the demand side of the balance sheet, the increase in production is enough to result in a surplus of production beyond consumption. While stocks in the U.S. are forecast to be low by historical standards, an increase in warehoused supply is predicted at the world level (+2.6 million bales).

Another supply-related point that has relevance for price discussions is that low U.S. stocks do not always translate into high prices. While current projections for U.S. ending stocks and the U.S. stocks-to-use ratio (SURs, ending stocks divided by demand) rank among the lowest recorded in recent decades, values close to these levels have been observed relatively frequently in the recent past.

The current value for the U.S. SUR for 2022/23 is 19%. There were years when low U.S. SUR values coincided with high prices. For example, in 2010/11, when demand was resurfacing after the financial crisis and China was scrambling to secure supplies, the U.S. SUR was 14% and NY/ICE futures averaged 143 cents/lb. In other years when the U.S. SUR was low and demand was more stable, high prices were not a result. Examples include 2013/14 (SUR 17% and average NY/ICE prices of 84 cents/lb), 2016/17 (SUR 15% and average NY/ICE prices of 73 cents/lb), and 2020/21 (17% and average NY/ICE prices of 78 cents/lb).

For supplies to be truly tight, not only do inventories need to be low, but there needs to be a strong enough pull from the demand side to create urgency and motivate buyers to bid up prices. In the current market, U.S. stocks are low, and there has been additional import demand from Pakistan. A question for the market is whether that is enough to warrant prices above current levels when the global macroeconomic outlook is deteriorating.

Other important questions come from China. China represents one-third of global mill-use and has accounted for one-third of U.S. exports in recent crop years. The size of the Chinese market is large enough to create the demand pull necessary to move the market. However, China has a large volume of available stocks within the country and Chinese prices are near parity with the A Index. Traditionally, Chinese prices trade 15-20 cents higher than the A Index, so this is an indication that domestic prices are more competitive internationally than they usually are. Chinese government policy is always an important (unknowable) variable, but neither the volume inventories nor lower relative Chinese prices suggest robust Chinese import demand. If China does not emerge as an aggressive buyer, it is unclear where the volume of demand necessary to lift prices may come from in the current macroeconomic environment.

Read the full Monthly Economic Letter: October 2022.