RECENT PRICE MOVEMENT

All cotton benchmarks decreased over the past month.

• The December NY/ICE futures contract broke through the 70 cent/lb level in the second half of July.  This represented the first time that a most actively traded contract fell below 70 cents/lb since November 2020.
• Over the past month, the A Index dropped below 80 cents/lb for the first time since December 2020.
• In June, the Chinese Cotton Index (CC Index 3128B) fell below 100 cents/lb.  Decreases continued in July, and the current value is 93 cents/lb.  In domestic terms, prices fell below 15,000 RMB/ton for the first time since December 2022. Current prices are 14,700 RMB/ton. The RMB strengthened against the dollar over the past month, from 7.28 to 7.17 RMB/USD.
• The decline in Indian spot prices (Shankar-6 quality) was slight, from 88 to 86 cents/lb.  In domestic terms, values eased from 58,000 to 56,500 INR/candy.  The INR held near 84 INR/USD.
• Pakistani spot prices fell from 80 to 76 cents/lb.  In domestic terms, values dropped from 18,300 to 17,400 PKR/maund.  The PKR was steady around 279 PKR/USD.

SUPPLY, DEMAND, & TRADE

The latest USDA report featured decreases to figures for global production (from 120.2 to 117.6 million bales) and mill-use (from 117.2 to 116.2 million bales).  World beginning stocks were lowered significantly (-3.5 million bales, from 79.3 to 75.8 million), driven by revisions to historical figures for China.  The net effect for the forecast for 2024/25 ending stocks was a -5.0 million bale reduction (from 82.6  to 77.6 million bales).

While the month-over-month decrease in stocks is large, it was due to revisions to historical estimates.  Those revisions also impacted figures for previous crop years.  As a result, year-over-year comparisons for stocks were less affected.  In 2024/25, ending stocks are still projected to increase (+1.8 million bales, from 75.8 to 77.6 million bales).  The volume of warehoused supply in 2024/25 is expected to rank as the highest since 2019/20 (crop year most affected by COVID), and as the highest on record when excluding 2019/20 and the period between 2012/13 and 2015/16, when Chinese reserves were exceptional.  

At the country-level, the largest change to production was for the U.S., where the crop estimate decreased -1.9 million bales (from 17.0 to 15.1 million bales).  Other notable updates were made for India (-500,000 bales to 24.5 million) and Cote d’Ivoire (-120,000 bales to 730,000). 

For mill-use, the largest changes included those for China (-1.0 million bales to 38.0 million), Bangladesh (-200,000 bales to 7.8 million), Pakistan (+100,000 bales to 9.6 million), and Turkey (+100,000 bales to 7.6 million). 

The global trade forecast was lowered -1.0 million bales (from 44.6 to 43.6 million).  In terms of imports, the largest changes were for China (-1.5 million bales to 10.0 million), Bangladesh (-200,000 bales to 7.8 million), Turkey (+100,000 bales to 4.8 million), Pakistan (+100,000 bales to 4.0 million), and India (+500,000 bales to 2.0 million).  For exports, the only change over 100,000 bales was for the U.S. (-1.0 million bales to 12.0 million).

PRICE OUTLOOK

In August, there is a change in the agency within the USDA that is responsible for generating the U.S. production number (USDA estimates for other countries are consistently made by the same agency).  The change in agency also involves a change in methodology that can result in large swings in published figures.  Weather conditions were less favorable last month (Texan crop condition ratings declined, and hurricane Debby made landfall in the southeast), but the change in methods was likely a major contributor to the USDA’s decrease to its U.S. production estimate (-1.9 million bales, from 17.0 to 15.1 million). 

While meaningful for the U.S. outlook, the revision does not alter the dominant storyline for the global cotton market in the new 2024/25 crop year.  Global cotton supply is expected to be ample, with the volume of world ending stocks projected to reach the highest on record outside of the crop year most affected by COVID (2019/20) and the period of extraordinary Chinese reserves (2012/13-2015/16). 

Beyond the volume of global warehoused supply, the amount of exportable cotton available from major exporters is predicted to climb to a record.  Brazil is expected to collect a record harvest.  Australia is projected to produce a crop within one million bales of its record.  West African production is anticipated to be near its average of the past ten years, while the U.S. is still forecast to grow +3.0 million more bales than it did last crop year.

This exportable cotton will have to compete for import demand.  A notable revision this month was the -1.5 million bale decrease to the import figure for China (to 10.0 million bales).  For comparison, Chinese imports in 2023/24 were 14.8 million bales and Chinese imports between 2020/21 and 2022/23 were between 7.5 and 8.5 million bales.  Competition for import demand may keep downward pressure on prices. 

Although there has been concern about the strength of the U.S. economy, due to weaker data on the labor market, downstream demand may eventually improve.  Europe is pulling out of recession.  The latest data from the U.S. suggest slowing inflation and a softening labor market.  Both of which suggest a rate decrease from the Federal Reserve may be forthcoming.  Confidence that the worst of macroeconomic conditions may be in the past may support order placement that could absorb at least some of the projected expansion in exportable fiber.

As the market moves toward planting decisions for 2025/26, it will have to contend with the supply response to lower prices.  In locations with opportunity for crop rotation and limited price guarantees for cotton producers, there is the risk of a sharp decline in acreage.  Depending on where the demand environment stands, the potential for a pullback in planting could lend eventual support to prices.

Disclaimer: The information contained herein is derived from public and private subscriber news sources believed to be reliable; however, Cotton Incorporated cannot guarantee its accuracy or completeness. No responsibility is assumed for the use of this information and no express or implied warranties or guarantees are made. The information contained herein should not be relied upon for the purpose of making investment decisions. This communication is not intended to forecast or predict future prices or events.