Monthly Economic Letter December 2018
RECENT PRICE MOVEMENT
Movement in global cotton prices was mixed over the past month, with values for NY futures moving slightly higher, values for Chinese prices moving slightly lower, and the A Index stable.
- As the December NY futures contract expired and the March contract took over as the nearby contract, prices for the NY Nearby shifted higher. In mid-November, values for the NY Nearby (then reflective of the December contract) were close to 76 cents/lb. At the start of December, values for the March contract were as high as 82 cents/lb. More recent prices have been near 80 cents/lb.
- The A Index has been steady since mid-November, maintaining levels near 87 cents/lb.
- The Chinese Cotton Index (CC Index 3128B) moved slightly lower in both international and domestic terms, easing from 103 to 101 cents/lb and from 15,700 to 15,400 RMB/ton.
- Indian spot prices (Shankar-6 quality) were range-bound in international terms, holding to levels between 80-82 cents/lb. In domestic terms, Indian prices drifted slightly lower, falling from 46,000 to 44,300 INR/maund.
- Conversely, Pakistani spot prices decreased slightly in international terms (from 80 to 77 cents/lb), but were stable in domestic terms (near 8,800 PKR/candy).
SUPPLY, DEMAND, & TRADE
This month’s USDA report featured decreases to global estimates for production (-645,000 bales, from 119.4 to 118.7 million) and mill-use (-1.3 million, from 126.9 to 125.6 million). With the decrease in consumption greater than the decrease in production, the net effect was a slight increase in global ending stocks (+583,000 bales, from 72.6 to 73.2 million).
At the country-level, the largest decreases in harvest expectations were for Pakistan (-600,000 bales, from to 8.0 7.4 million), China (-500,000 bales, from 27.5 to 27.0 million), India (-500,000 bales, from 28.0 to 27.5 million), Turkey (-200,000, from 4.5 to 4.3 million), and Turkmenistan (-200,000, from 1.2 to 1.0 million). Partially offsetting the effect of these reductions at the world-level were increases to estimates for Brazil (+1.0 million, from 10.0 to 11.0 million), the U.S. (+180,000, from 18.4 to 18.6 million), and Cote d’Ivoire (+125,000, from 725,000 to 850,000).
The decrease in the global consumption figure was likely influenced by recent reductions to forecasts for global economic activity in 2018 and 2019. Notably, the International Monetary Fund (IMF) reduced their forecasts for world GDP growth in both 2018 and 2019 from 3.9% (April estimates) to 3.7% (October estimates). Uncertainty surrounding the trade dispute between the world’s two largest economies may also be a contributing factor. At the country-level, the largest changes to mill-use numbers were for China (-1.0 million bales, from 42.5 to 41.5 million), Pakistan (-200,000, from 10.8 to 10.6 million), Turkey (-100,000, from 7.1 to 7.0 million), and Uzbekistan (-100,000, from 2.8 to 2.7 million).
The USDA’s global trade estimate increased 600,000 bales month-over-month (from 41.1 to 41.7 million). In terms of imports, the largest revisions were for Pakistan (+300,000 bales, from 2.6 to 2.9 million), India (+100,000, from 1.5 to 1.6 million), and Malaysia (+100,000, from 575,000 to 675,000). In terms of exports, the largest revisions were for Brazil (+300,000, from 5.5 to 5.8 million), Cote d’Ivoire (+100,000, from 700,000 to 800,000), India (+100,000, from 4.3 to 4.4 million), Uzbekistan (+100,000, from 700,000 to 800,000), and Australia (-100,000, from 3.7 to 3.6 million).
While the market is still a few months away from the point when initial estimates for the upcoming 2019/20 crop year will be published, there are several developments that seem foreseeable. As has been the case in recent years, cotton prices are attractive relative to those for crops that commonly compete for cotton acreage. This suggests that global cotton acreage, and potentially global production, could expand.
As a range of difficult growing conditions around the world proved in 2018/19, acreage alone does not determine harvests. The weather will remain unknown until it is experienced. Nonetheless, at least one major weather-related challenge from the current season has abated. The drought in the important West Texan region of the U.S. has been eliminated by precipitation in recent months. A return to adequate moisture conditions in West Texas alone could add a couple million bales to the global harvest next year. Relative to 2018/19, there is also room for improvement in growing conditions for China, India, Pakistan, and Australia.
An emerging consideration for 2019/20 is the threat of slowing economic growth, which could imply slower growth in mill-use. What is currently expected by the IMF is that global economic growth will hold steady at a level close to where it has been recently. The IMF’s downward revisions to world GDP figures flattened previous projections that called for accelerating growth and instead suggest steady growth (estimated growth for 2017 is 3.7%, forecasts for 2018, 2019 and 2020 all at 3.7%). While the latest projections are less optimistic, growth rates of 3.7% still represent the strongest rates of expansion since 2011.
The expected combination of higher production and slower growth in mill-use next crop year could narrow the production gap that exists in 2018/19 (6.9 million bales, or about 5% of mill-use). This has implications for global stocks, which have some relevance for prices. Since the price spike, however, the allocation rather than the volume of world stocks has carried more significance for prices. For the past four years, global stocks have trended lower. This is principally due to the drawdown in China. Over the past three years, there has been an upward trend in stocks outside China.
Relatedly, central questions for prices in 2019/20 center on trade. Specifically, will China begin to increase its imports in a big way and what will the outcome be to the U.S.-China trade dispute. Thus far, the accumulation of supply outside of China has not had a significant downward effect on prices. This may have been because the market has been anticipating an increase in Chinese imports. If Chinese imports do not rise as expected, a further buildup of stocks among exporters may push prices lower. If Chinese imports do rise to the volume required to stabilize Chinese stocks, implying an import level equal to China’s domestic production deficit (14.5 million bales for 2017/18), prices could be expected to move in the other direction.