Monthly Economic Letter August 2021
RECENT PRICE MOVEMENT
Most benchmark prices increased last month.
Values for the December NY/ICE futures contract held between 88 and 90 cents/lb for much of July. In early August, futures resumed their climb and have reached levels over 93 cents/lb.
- Over the past month, the A Index breached 100 cents/lb for the first time since June 2018. June 2018 was just before the first round of U.S.-China tariff increases went into effect.
- The Chinese Cotton Index (CC Index 3128B) took steps higher in the middle and end of July. A net result is that prices increased from 116 cents/lb in early July to 124 cents/lb by early August. In domestic terms, prices increased from 16,500 to 17,700 RMB/ton. The RMB fluctuated against the dollar over the past month but ended the period nearly unchanged at 6.48 RMB/USD.
- Indian spot prices (Shankar-6 quality) increased from 90 to 97 cents/lb over the past month. In domestic terms, prices increased from 52,500 INR/candy to 56,100 INR/candy. The INR was stable against the dollar over the past month, consistently trading near 74 INR/USD.
- Pakistani spot prices decreased and then recovered over the past month. In international terms, values fell from 100 to 95 cents/lb between early and late July. In August, Pakistani values climbed back to 100 cents/lb. The PKR weakened against the dollar over the past month, from 159 to 164 PKR/USD.
SUPPLY, DEMAND, & TRADE
The latest USDA report featured a slight decrease to the world cotton production forecast (-546,000 bales to 118.8 million) and a slight increase to the world mill-use projection (+170,000 bales to 123.3 million). Along with historical revisions that lowered beginning stocks for the new 2021/22 crop year, the net effect was to lower the figure for 2021/22 ending stocks -511,000 bales to 87.2 million.
The estimate for world-less-China stocks fell -800,000 bales to 52.4 million. The current value for the world-less-China stocks ranks in the top three all-time. The current value for the world-less-China stocks-to-use ratio (56.7%) ranks among the three highest in the modern era (since 2000/01).
The largest changes at the country-level for production included the decreases to forecasts for 2021/22 for Brazil (-750,000 bales to 12.5 million), the U.S. (-536,000 bales to 17.3 million), Uzbekistan (-200,000 bales to 3.4 million). These decreases were partially offset by higher expectations for harvests from Australia (+500,000 bales to 4.4 million), Mali (+185,000 bales to 1.5 million), and Tanzania (+100,000 bales to 600,000).
The only notable changes to country-level projections for 2021/22 mill-use included those for Bangladesh (+100,000 bales to 8.5 million) and Pakistan (+100,000 bales to 10.6 million).
The global trade forecast increased +335,000 bales to 46.3 million. If realized, this would rank as the third-highest volume on record, only behind 2012/13 (47.6 million bales) and 2020/21 (48.4 million bales).
For imports, the only revision for 2021/22 forecasts that was over 100,000 bales was for Pakistan (+300,000 bales to 5.6 million bales). For exports, the largest changes were for Australia (+200,000 bales to 3.5 million), Mali (+150,000 bales to 1.3 million), Uzbekistan (-100,000 bales to 150,000 bales), and the U.S. (-200,000 bales to 15.0 million).
The final set of weekly U.S. export sales and shipment data for the 2020/21 crop year were just released by the USDA. A dominant storyline in these data over the past 12 months has been the strength of U.S. export shipments, especially in the face of the global COVID pandemic. Although shipments did tail off near the end of the crop year, total U.S. exports in 2020/21 rank as the second-highest on record, only behind the 17.7 million bales shipped in 2005/06.
China was a driver of that strength. Cumulative U.S. shipments to China in 2020/21 totaled 5.2 million 480lb bales, representing 32.0% of total U.S. exports. This is twice the volume the U.S. sent to China in 2019/20 (2.6 million bales) and more than three times the amount the U.S. sent to China in 2018/19 (1.6 million bales). U.S. exports to China in 2020/21 rank as the fourth-highest on record. The U.S. has exported as much as 9.1 million bales to China (2005/06).
In recent weeks, buying activity from China has slowed. Reports suggest that Chinese mills have been picking up consignment stocks already available in Chinese ports rather than making purchases that require further delivery. In addition, the Chinese government has been making sales from its reserve stocks. Demand at these auctions has been strong, with the volume offered for sale routinely selling out, despite much of that cotton being offered for sale being 8 to 10 years old (from the 2011 to 2013 cotton harvests).
In the new 2021/22 crop year, questions swirl around the outlook for U.S.-China trade relations and export volumes. It is unknown what may follow the Phase One deal, but it is scheduled to expire at the end of December. Chinese demand helped pull U.S. stocks tighter in 2020/21. The threat of further tightening of U.S. stocks in 2021/22 may be a factor associated with the uptrend in cotton prices over the past 12 months. Whether or not the U.S. will sell a large amount of cotton to China in the new crop year should be a factor that determines how tight U.S. stocks will become.
Another factor to watch for price direction remains COVID. The spread of the Delta variant has already led several important manufacturing countries (e.g., Vietnam) to introduce protective measures that have shuttered factories. A macroeconomic outlook calling for strong global GDP growth suggests continued strength in mill demand. However, if health-driven restrictions are implemented in more locations, it could dampen consumer demand and manufacturers’ willingness to place orders.