Cotton Market Fundamentals & Price Outlook

27RECENT PRICE MOVEMENT

 

Movement in global cotton prices was mixed over the past month. The A Index and NY futures shifted slightly higher, Chinese prices drifted lower, while Indian and Pakistani prices were flat to slightly lower.

 Following this month’s USDA report, prices for the March NY futures contract rose above the 62 cents/lb mark for the first time since November. Support for U.S. prices may have come from strong export sales and forecasts calling for a decline in acreage in 2015/16.

 The A Index has mirrored movement in NY futures, with values edging higher (from 65 cents/lb to 69 cents/lb).

 Chinese cash prices, as represented by the CC Index, eased from values near 100 cents/lb to those near 98 cents/lb over the past month. In local terms, prices decreased from 13,600 RMB/ton to 13,450 RMB/ton.

 Indian spot prices for the Shankar-6 variety moved marginally lower, declining from 63 to 62 cents/lb in international terms. In local terms, prices dropped from 32,000 to 30,600 INR/candy.

 Pakistani spot prices held to values between 57 and 60 cents/lb in international terms and between 4,700 and 4,950 PKR/maund in local terms over the past month.

 

SUPPLY, DEMAND, & TRADE

 

In the latest USDA report, the forecast for the 2014/15 world cotton harvest was revised slightly higher (+206,000 bales to 119.4 million) while the forecast for world cotton mill-use was revised lower (- 985,000 bales to 111.3 million). An effect of higher production and lower consumption estimates was a 1.2 million bale increase to the figure for global ending stocks (to 109.8 million bales). At the country-level, the only revision to production figures over 100,000 bales was for Pakistan (+200,000 bales, to 10.4 million). In

terms of mill-use, the largest country-level change was for China, where the consumption forecast was lowered 1.0 million bales to 35.5 million. This month’s reduction to the Chinese consumption estimate

was the fourth consecutive downward revision (USDA forecast in October was 38.0 million) and suggests diminished expectations for a rebound in Chinese mill-use with the decrease in Chinese prices that

followed reforms to Chinese cotton policies. At its current level, the forecast for Chinese consumption is 1.0 million bales above the figüre for last crop year, but is lower than the volume for 2012/13, when the

CC Index averaged 139 cents/lb and was more than 50 cents/lb above the average for the A Index. Other notable country-level revisions to mill-use figures were for the U.S. (-150,000 bales to 3.7 million),

Indonesia (+100,000 to 3.2 million), and Vietnam (+150,000 to 3.6 million). In just the past four weeks of sales data, the U.S. export commitment increased by 2.0 million bales. The recent pickup in sales led the USDA to lift their forecast for U.S. exports by 700,000 bales (to 10.7 million). Virtually all of the recent acceleration in U.S. sales resulted from new contracts signed with China and Vietnam. Import forecasts for both of these countries were revised higher this month (+300,000 to 7.3 million for China, +200,000 to 3.8 million for Vietnam). Other notable changes to trade figures included a decrease in Indian exports (-500,000 bales to 4.2 million), an increase in Pakistani exports (+150,000 to 600,000), a decrease in Pakistani imports (-200,000 to 800,000), and an increase in Indonesian imports (+100,000 to 3.3 million).

 

PRICE OUTLOOK

The National Cotton Council (NCC) released results from their survey of U.S. cotton producers’ planting intentions last weekend. Findings suggest that total U.S. cotton acreage will decline 14.6% in the 2015/16 crop year (from 11.0 million to 9.4 million). Upland acreage is forecast to decrease 15.2% (from 10.8 million to 9.2 million acres), while pima acreage is expected to increase 22.8% (from 192,000 to 236,000). The NCC multiplied expected acreage by state-level averages for yield and abandonment to derive a theoretical 2015/16 national harvest of 14.0 million bales. If China can be assumed to limit import quota again next crop year, U.S. exports could be assumed to remain depressed at a level near the estimate for the current crop year (10.7 million bales). Despite this month’s reduction, there has been investment in U.S. spinning, and U.S. consumption could be expected to be flat to higher next crop year, possibly between 3.7 and 4.0 million bales. The combination of stable exports and mildly higher mill-use suggest a possible offtake from U.S. supplies near 14.5 million bales for 2015/16. Since this value is only slightly higher than the potential harvest outlined by the NCC, 2015/16 ending stocks could be expected to be only slightly lower than the carryout from the current crop year. This crop year, the USDA projects both U.S. ending stocks to increase by 70% (from 2.5 million to 4.2 million bales). The sharp increase in U.S. supply is a reason why there has been downward pressure on U.S. prices. Even with a slight reduction in stocks in 2015/16, U.S. stocks should remain elevated, and the availability of cotton in the world’s largest exporting country could be expected to maintain downward pressure on prices around the world. However, as has been the case for the past several crop years, the amount of precipitation in West Texas and the volume of Chinese import demand will likely be key variables that could push or pull U.S. stocks tighter or looser and could be expected to shape price direction.

 

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