Monthly Economic Letter: September 2022

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Cotton Market Fundamentals & Price Outlook

Recent Price Movement

Movement in benchmark prices was mixed over the past month.

  • The December NY/ICE futures contract climbed higher in the second half of August, but it lost 12% in the last week of the month (from 117 to 103 cents/lb between August 29th and September 2nd). More recently, values have been trading between 101 and 105 cents/lb.
  • After rising most of the month, the A Index also fell near the end of August, dropping from 134 to 122 cents/lb.
  • The China Cotton Index (CC 3128B) has been the lowest of all cotton benchmarks since the middle of August. Prices moved slightly lower recently, with current values touching the lowest levels since January 2021 (103 cents/lb, when they were 26 cents/lb higher than the NY/ICE Nearby). The CC Index traded between 15,650 and 16,000 RMB/ton in domestic terms over the past month. The RMB weakened against the dollar from 6.75 to 6.95 RMB/USD.
  • Indian spot prices (Shankar-6 quality) have been the highest benchmark since late June (after surpassing the A Index, which includes shipment to East Asian ports). Over the past month, values eased slightly, from 158 to 143 cents/lb or from 96,000 to 89,000 INR/candy. The INR was steady against the USD, around 80 INR/USD.
  • With the outbreak of flooding, Pakistani spot prices increased from 102 to as much as 127 cents/lb by the end of August. More recently, prices retreated to 117 cents/lb. In domestic terms, prices increased from 18,000 to 22,000 PKR/maund. The PKR weakened against the USD, from 215 to 230 PKR/USD over the past month.

Supply, Demand, & Trade

The latest USDA report featured an increase for 2022/23 global production (+1.4 million bales to 118.4 million) and a decrease for 2022/23 global mill-use (-460,000 bales to 118.6 million). Along with revisions to historical figures, these changes boosted the USDA’s forecast for 2022/23 ending stocks by 2.0 million bales (to 84.8 million).

Flooding in Pakistan pulled the forecast for Pakistani production—700,000 bales lower (to 5.5 million). Another major country-level change was for the U.S., where the crop estimate increased +1.3 million bales (to 13.8 million) due to a large upward revision in planted acreage (+1.3 million acres relative to the August number). Other notable changes included updates for Australia (+500,000 bales to 6.0 million), China (+500,000 to 28.0 million), Turkey (+100,000 to 4.4 million), Togo (-105,000 to 105,000), and Uzbekistan (-200,000 to 2.7 million).

At the country-level, the largest changes for mill-use were for Pakistan (-400,000 bales to 10.5 million) and Vietnam (-100,000 to 6.8 million).

The global trade estimate was unchanged at 44.6 million bales. Import figures were lowered for Turkey (-100,000 bales to 4.8 million) and Vietnam (-100,000 to 6.9 million) but were increased for Pakistan (+200,000 to 5.0 million). The export figure was lowered for Brazil (-700,000 bales to 8.6 million) but increased for Mexico (+100,000 to 500,000), Australia (+200,000 to 6.4 million), and the U.S. (+600,000 bales to 12.6 million).

Price Outlook

Traditional relationships among cotton benchmarks flipped in recent months. The CC Index, which traditionally trades at levels 15-20 cents/lb higher than the A Index, has been the lowest international price since mid-August. Indian spot prices (Shankar-6 quality), which traditionally trade near NY/ICE futures (December currently at 105 cents/lb), have been the highest benchmark since late June (currently near 143 cents/lb, easily exceeding the A Index, which includes delivery to East Asia ports).

The decline in Chinese prices relative to those from the rest of the world may affect trade in the new crop year. China is normally the world’s largest importer of both cotton fiber and yarn. However, significantly lower domestic prices encourage consumption of domestically grown fiber and should discourage imports.

Last crop year, Chinese gins aggressively purchased seed cotton at elevated prices. Disagreements about downstream prices prevented much of that fiber from flowing to spinning mills. A result was the record accumulation of private (non-reserve) stocks. Those supplies are a likely factor weighing on the Chinese market. The U.S. ban on sourcing from Xinjiang is another potential contributor, but with Chinese prices lower than those in other markets, Chinese inventories could be drawn down while imports of fiber and yarn could fall.

When China drew down its reserve stocks (2015/16-2018/19), Chinese imports fell as low as 4.4 million bales (2015/16). Since then, China has imported as much as 12.9 million bales (2020/21). China brought in 7.8 million bales in 2021/22 and is forecast to import 9.0 million bales in 2022/23. The U.S. crop is forecast to be 3.7 million bales lower year-over-year in 2022/23. If China were to return to import volumes near 2015/16 levels, it could erase the tightness in exportable supply stemming from a smaller U.S. crop.

Chinese yarn imports, which also involve competition between domestic and international fiber prices, have already fallen. In the latest available data (July 2022), shipments were down -41% year-over-year, dropping to the lowest monthly volume in ten years (since 2012). China sources much of its yarn from Vietnam (48% share during the 2021/22 crop year), and a possible consequence of lower Chinese yarn import demand could be lower fiber import demand from Vietnam (world’s third largest destination).

Other demand-side concerns include another lockdown in a major Chinese population center, surging energy costs in Europe, and renewed indications from Federal Reserve officials that the central bank is prepared to continue to increase interest rates. The U.S., the E.U., and China represent the world’s largest consumer markets for finished cotton goods, and none of these developments are supportive of downstream demand.

These demand-side concerns flared simultaneously with the flooding in Pakistan and were likely reasons why prices decreased sharply that week. When paired with a potential pullback in Chinese fiber and yarn imports, downstream concerns could more than offset tightness in exportable supply. However, recent market volatility underlines uncertainty in the market. Volatility could continue as the market struggles to balance exportable stocks against headwinds for demand.

Read the full Monthly Economic Letter: September 2022.